Hi guys, I am not sure of the reason why capitalization will affect cash flows from operations will be higher while investing cash flows will be lower. Could someone kindly explain? Thanks alot.
I can’t believe I’m replying to a post at 2:30am in the morning, my brain is not working very well but here’s what I remember, when you capitalize, it becomes an asset, so instead of recording as operating expense (CFO), you record it as cash outlay for asset (CFI), so CFO is overstated, while CFI is understated
Are we talking from the point of view of the lessee? This is directly from a schweser practice test I’m taking right now: Operating lease payments are recorded as rent expense on the lessee’s income and cash flow from operations statements. Capital leases are recorded on the lessee’s balance sheet as an asset and liability and depreciated on the income statement with cash flow from operations reduced by the interest expense and cash flow from financing reduced by the principal payment. So CFO is overstated and CFF is understated, not CFI.
arty, if you don’t capitalize the whole payment is considered a CFO outflow, if you capitalize only a portion of the amount will be CFO outflow.
yeh i remember it like liaaba… capitalising increases Assets, which causes a cash outflow from Investing… so, CFI goes down, therefore CFO must go up (since total cash flow does not change…it is merely a change in classification).
it works for not only leases, but anything you want/can capitalize, so just capitalization in general
<< capitalising increases Assets, which causes a cash outflow from Investing… >> Okie, I am having a mental block on this. So how does this actually works? Sorry if this sounds too lame to be asked. Thanks!
well to ‘capitalise’ something means to allocate an expense to the balance sheet, by recording it as an asset… so if assets go up, this is a USE of cash, so cash flow goes down… and LT asset changes are classified as CFI thats how i picture it in my head anyway…
But double check moto376 statement that with capital leases, it becomes a CFF issue, not a CFI issue. I haven’t yet gotten to capital leases. Dreary