Hi, just a quick question, why capitalized interest will result in higher ROA initially and lower ROA later on compared to expensed interest? Thanks!
this is kind of murky waters, but take a simple example capitalize 100 of interest over 2 years, versus expensing 100 in 1st year. in 1st year NI is higher by capitalizing interest as it's only a 50 expense in 2nd year NI is higher for the expensing firm as the full expense was charged previously, whereas 50$ is still being capitilized by the capitalizing firm assets are unchanged under either scenario (I believe…) therefore the result is ROA is higher earlier, lower later for capitalizing firms.
when an exp. is cap. an asset is added to the bal sheet. just remember when an exp. is capitalized like the previous example $50 more in earnings (which small number compared to assets or equity) divided by $50 more in asstets (bigger number) overall effect is an increase in roe and roa. let me know if this makes sense is a lilttle late… go nite