I’m trying to sharpen up on this topic so I have a question on capitalizing vs expensing. If we expensed the asset (hence not providing any future benefits) which classifed account would it be under in the CFO? How would expensing an asset be reported in the CFO? I understand that expensing will affect the CF statement but can’t draw the picture. Hopefully someone can clear this up for me. Thanks!
If you expense the asset it would be a component of operating expenses. Under the indirect method of calculating CFO you would not need to consider it because you work backwards from net income. Under the direct method it would fall under cash paid for operating expenses. Hope this helps!
Is there such an account call “operting expense” in the CFO? If we would capitalize the asset would this be “purchase of PPE” in the CFI?
In the direct CFO method there is a section for “cash paid for operating expenses”. There is not under the indirect method.
If you expense it, cash outflow is classified as CFO and is reflected on the income statement as an expense = Lower EBIT = Lower Net Income. Operating expense, under the indirect method, is already reflected in NI.
which classified account? – Lease expense whose CF will be categorized under CFO. If this were to be capitalized, which classified account? – two, interest expense (debt) and depreciation expense (asset) interest expense CF will be categorized under CFF depreciation expense CF will be categorized under CFO. If you are a lessor then the interest income will be CFI and depreciation will be categorized under CFO… hth
Depreciation aint no cash flow from operations. It’s added back to NI when calculating CFO because it’s a non-cash expense.
A leasee, under operating lease - all expense classified as CFO. A leasee, under capital lease - interest expense = CFO, principal/depreciation = CFF No?
I believe Depr is not in the CFO because like soddy1979 said, it’s a non-cash expense. It’ll be added back to the NI under the indirect method, that’s true. But when it comes down to capitalizing the asset, you’ll see the reduction in the asset every year which should be reflected in your CFI due to the decrease in asset value every year. The asset is stored in the B/S the expenses are released every year as the depreciation expense which will hit the I/S, so that’s why we have to adjust in the NI for indirect method (depr is a non-cash expense).
alsrs Wrote: ------------------------------------------------------- > But when it comes down to > capitalizing the asset, you’ll see the reduction > in the asset every year which should be reflected > in your CFI due to the decrease in asset value > every year. No. Guys this is easy. Every year do you pay for the asset or only when you purchase it? There is your answer to your cash flow quandry. When you purchase an asset in 2007 for $10,000 your CF statement from 2007 will be impacted. In subsequent years you must adjust NI for NON-CASH charges (IE add back dep expense). Change in the BV of an asset does not involve the exchange of cash and will have zero impact on the statement of CF. This change will impact your BS and IS.
brianr - brianr Wrote: > Change in the BV of an asset does not involve the > exchange of cash and will have zero impact on the > statement of CF. This change will impact your BS > and IS. Then how would you explain the CFI will be lower if an asset was capitalized? Shouldn’t that be because the asset’s BV reduces every year (subtracting depreciation) and reflected by the lower asset value in the CFI.