Question says: ignoring the effects of income taxes, the expensing of previously capitalised interest, most likely causes cash flow from operations to be: lower, unchanged or higher? Answer is unchanged. Answer says: the expensing of the previously capitalised interest is a non-cash amount (the cash outflow in a previous period when the expense was incurred) and therefore does not affect operating cash flow. Net income is lower as a reulst of the previously capitalised amount being expense, but as it is a non-cash expense it is added back to determine cash from operations. (Lower net income but higher add back = no change in CFO). I thought expensing would reduce CFO, can someone please explain their answer above?
So you’re expensing something that was previously already a cash outflow because it was capitalized. It already went through the cash flow statement when it was capitalized so there shouldn’t be any second counting here
Plus, if you’re in real time you should know that capitalizing interest for construction is a CFFIoutflow, as it is included in the costs associated with the construction project, so if anyting it would decrease that and CFO would be higher, but this is only in REAL TIME, not as when the question alludes to a previous cost
The net change in cash flow amount is zero, but for the purposes of adjustment, wouldn’t you add the amount to CFI, and subtract the amount from CFO. (in order to expense the amount that was capitalised previously).