Capitalized costs

A firm that capitalizes rather than expensing costs will have:

A) lower cash flows from operations

B) lower cash flows from investing

C) lower profitability in the earlier years

What is the answer and why?

C is not correct because a firm that capitalizes costs shows higher profitability in the earlier years as compared to expensing (not the entire cost is charged in one year but only a part of it - depreciation).

Since the costs form part of the acquisition price when capitalising, cash flow from operations will be higher and cash flow from investing lower than if the firm is expensing costs. Therefore the answer should be B in my opinion.

B is correct. When a firm chooses to capitalize instead of expensing, the noncurrent asset increases in the balance sheet and lowers the investing cashflow.