How does an analyst account for this? Decrease asset, increase liabilities, increase interest expense (i.e. reduce net income) right?
increase asset (which is offset with the increase liabilities)
thats what i thought thanks
When you put net pension liability on the balance sheet, is there and offset to 1)Equity or 2)Equity and Deferred Tax Asset?
Hey guys capitalize expense - need not necessarily go with increasing liabs. You are confusing this with capitalizing leases. From Investopedia – which is exactly what I have been saying so many times: Investopedia Says What Does Capitalize Mean? An accounting method used to delay the recognition of expenses by recording the expense as long-term assets. In general, capitalizing expenses is beneficial as companies acquiring new assets with a long-term lifespan can spread out the cost over a specified period of time. Companies take expenses that they incur today and deduct them over the long term without an immediate negative affect against revenues. Investopedia explains Capitalize If a company capitalizes regular operating expenses, it is doing so inappropriately, most likely to artificially boost its operating cash flow and look like a more profitable company. Because a company can’t hide its expenses forever, such a practice will fail in the long run. It is important not to confuse capitalize with capitalization.
Deferred taxes on Pensions is last year’s method. This year it is Equity only. No tax impact.
cpk r u sure? i coulda sworn i remember doing a qbank question where they adjusted for a company taht capitalized expenses by decreasing the asset and adding that intest amount as a liability
that would have been a capitalizing Interest question.
o crap thats what i meant. is the ab ove correct for capitalizng interest? decrease asset, increase liabilities, increase interest expense (i.e. reduce net income)
Wait hold the phone. Don’t you want to capitalize assets, or is that just operating leases? I’ve never done a problem where you had to un-capitalize an asset.
you have to “uncapitalize” the interest on an asset
On this topic, I can’t believe I’m asking this, but for some reason it’s slipping my mind now: Okay, say you’re capitalizing an expense, but it’s NOT a lease or interest expense from a project. Just some other cost, like new PP&E. So you capitalize the expense which increases assets. How is this reconciled on the balance sheet? I know the first default is to assume liabilities given what we know about capitalized leases, but I don’t think that’s always necessarily the case for other capitalized costs. Is the offset that either cash is used, thus offsetting the increase in PP&E, or if debt is used, then liabilities do in fact increase? Also, because the expense is now capitalized, the result will be higher next income and thus higher retained earnings (equity), than would otherwise be the case. But this increase in retained earnings (vs. expensing) is not a one-for-one increase compared to the reduction of operating costs, correct? Taxes will reduce the flow through of earnings to retained earnings. So now, say we have new capitalized PP&E (higher assets) and we used cash in this case (i.e., one-for-one offset between assets values), ultimately resulting in higher net income (vs. expensing) and thus higher retained earnings. Assuming liabilities remained unchanged how is the higher retained earnings reconciled on the balance sheet? Depreciation of PP&E, lower inventories, change in current assets, etc. (i.e., basic balance sheet mechanics)? I’m totally overthinking this now and/or having a major case of brain cramp.
the show, yes I think you’re correct on capitalized interest. You take it out of assets (assets go down) but I’m not sure about liability because I don’t remember anything in liability related to capitalized interest… My guess would be that it goes a reduction to other comprehensive income. But for sure you deduct the expense in the I/S. Then the interesting thing comes when you adjust the CF statement because interest early on was considered an outflow CFO, which it shouldn’t be. It reduced NI. So, you adjust your CFO by deducting this amount of interest from it (to cancel out what was deducted from NI before). Since this adjustment leads to a NI increase you need to adjust your CFO by adding the net after tax interest. Then go to your CFI and add the capitalized interest to it, straight up, that’s where that sucker belongs…interest in this case is an INVESTING cash flow. Finally, go to your CFF and deduct net after tax interest which belongs there… I think that’s right.
Dreary Wrote: ------------------------------------------------------- > the show, yes I think you’re correct on > capitalized interest. You take it out of assets > (assets go down) but I’m not sure about liability > because I don’t remember anything in liability > related to capitalized interest… My guess would > be that it goes a reduction to other comprehensive > income. But for sure you deduct the expense in > the I/S. > > Then the interesting thing comes when you adjust > the CF statement because interest early on was > considered an outflow CFO, which it shouldn’t be. > It reduced NI. So, you adjust your CFO by > deducting this amount of interest from it (to > cancel out what was deducted from NI before). > Since this adjustment leads to a NI increase you > need to adjust your CFO by adding the net after > tax interest. > > Then go to your CFI and add the capitalized > interest to it, straight up, that’s where that > sucker belongs…interest in this case is an > INVESTING cash flow. Finally, go to your CFF and > deduct net after tax interest which belongs > there… I think that’s right. Right, all interest related expenses are reclassified as CFF