by capitalizing, the firm will have lower ROA, higher CFO, and lower D/E ratio if lower ROA, and higher CFO, which item increased CFO , but not net income in CFO? if capitalize the long-lived asset, what is the form of the expense? in the form of depreciation? will that reduce CFO? or in the form of interest expense? if it is interest expense, dose it still reduce CFO? Thanks. once capitalize the asset, will that bring any impact to liability? Thanks.
higher CFO because the interest expense is lower when you capitalize. ROA = NI/Assets Assets go up when you capitalize the asset. So ROA is lower.
is the interest expense gose to CFI, or CFO? deducted? Thanks. budfox427 Wrote: ------------------------------------------------------- > higher CFO because the interest expense is lower > when you capitalize. > > ROA = NI/Assets > > Assets go up when you capitalize the asset. So > ROA is lower.
interest expense is an operating CF
Capitalizing an asset leads to the following relative to expensing: Cash Flow Statement: the cash cost of acquiring the asset is a CFI rather than CFO outflow. Therefore, CFO is higher and CFI is lower for a capitalizing firm relative to an expensing firm. Income Statement: Instead of a one-time hit to net income of the entire cost of the asset, only a portion is charged against net income in the form of depreciation. The result is that net income is higher for the capitalizing firm in year 1. Balance Sheet: Assets are increased by the cost of the item. Sometimes it is confusing to consider the impact on ratios such as return on assets, because (in the first year) net income is higher, but assets are also higher for the capitalizing firm. Consider though that assets are usually greater in magnitude than net income. Therefore, an increase of net income and assets by the same amount will increase the return on assets. For example, 10/100 = 10%, but 11/101 = 10.89%.