why profitability remains lower for expensing firm as long as the level of expenditure increasing? and why cash expenditures on long-lived assets for expensing firm are included in CFO?
Expensing firm would consider any expense, even for long lived assets as a period expense. A normal capitalizing firm would add it to long lived P P & E account, and a portion of it would be considered the depreciation expense (according to the matching principle). So the expensing company would take 100K expense in this period (for a 10 year equipment bought today). This would reduce Net Income, taxes, everything. The capitalizing firm would take 10K expense in this period. So its NI would be higher, hence higher profitability. CP
as far as the cash flow question- for the expensing firm, the entire expense of the asset is on the income statement for the period in which the asset was purchased, so it is included in CFO, but it doesn’t affect CFI. for the capitalizing firm, it doesn’t affect CFO because depreciation is added back to net income to arrive at CFO, but it does hit CFI as an outflow therefore, the capitalizing firm will always report higher CFO than the expensing firm.