capitalizing vs expensing

Please solve this question with explanation…

Train, Inc.’s cash flow from operations (CFO) in 2004 was $14 million. Train paid $8 million cash to acquire a franchise at the beginning of 2004 that was expensed in 2004. If Train had elected to amortize the cost of the franchise over eight years, 2004 cash flow from operations (CFO) would have been:

A) $22 million. B) unchanged. C) $21 million.

A $22mio. I’m assuming if the $8mio was immediately expensed, then it would come out of CFO. If it’s amortised, then the $8mio would come out of CFI (and $1mio is expensed/depreciated each year).

This sounds like a clear CFI outflow with no impact on CFO!

Unchanged! 8M outflow from CFI.

CFO not affected by dep (noncash).

ok lets see…expensing is reduced from CFO and capatalising is reduced from CFI…the depreciation does not affect anything…

so $8m is added back to CFO and $8m is reduced from CFI…

CFO + 8m and CFI - 8m

so answer is A

but there is anothor factor, which i guess is not an issue in this ques…TAXES…expensing reduces NI therefore reducing taxes on the other hand capitalizing will give give a relatively higher NI therefore lower taxes…so if there is question with tax given somewhere, you need to add CFO a little bit more due to tax not paid this yr…

hope this helps vikas

-Gyan

Is A really the answer?

found this on web…don’t kow if it is correct.

1.Train, Inc.’s cash flow from operations (CFO) in 2004 was $14 million. Train paid $8 million cash to acquire a franchise at the beginning of 2004 that was expensed in 2004. If Train had elected to amortize the cost of the franchise over eight years, 2004 cash flow from operations (CFO) would have been:

A) $22 million.

B) $21 million.

C) $7 million.

D) unchanged.

The correct answer was A)

If Train decided to amortize the franchise cost, it would be capitalized and $1 million each year would be treated as a reduction in cash flow from investing (CFI). None of the cash expended would flow though CFO, and all of the $8 million would be added back to CFO