I don’t quite understand the cash flow implications of Capatizlising costs.
Why does it reduce investment cash flow?
Whether you expense costs or not there is a cash outflow and so must be recorded somewhere.
If you do expense costs, then it reduces net income and is an operating cash flow.
If you capitalise them, it doesn’t reduce net income and must be classed as an investment cash flow.
I think a small modification might have to be applied to the second statement. Capitalizing does affect net income. In the first year, capitalizing will result in higher net income because the cost is equally reallocated over a period. But subsequently, because an incurred expense would only affect the first year’s net income, therefore capitalizing will cause lower net income in later years.
Yes, sorry, I was only talking about that year. Surely future year’s net income would only be lower if the asset was depreciated, amortised or impaired.
Dude, think about capitalizing the expense as buying asset. Then, obviously, it’s CFI. Then, expensing cost is not buying asset, and not raising more money from anywhere, so definitely CFO. God, I’m such a good teacher! Haha just kidding