# Expensing Vs Capitalizing

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) \$21 million. B) \$22 million. C) \$7 million. D) unchanged.

B) 22 mil ? Acquiring franchise = CFI outflow? But because of amortization, CFO = 14 + 8 in 2004?

A) 21 14 + 8 - 1 the 1 due to amort

Hmmm…at first D jumped out at me, because reclassifying this wouldn’t really change how much cash they generated/paid in the year… However, I would think that the 8 Million would be considered cash flow to investing activities if you capitalized it… so B?

i go with d) purchasing the franchise should be an investing activity as hoffmag pointed out

D. - Expensing vs capitalising is an accrual accounting choice, it does not affect cashflow.

I’m still with B. True, it doesn’t affect TOTAL cash flow, but it does affect how the cash flow is allocated between CFO and CFI.

But it is still an investment not an operating expense. So the CF statement would show: CF from Ops +\$14m CF from Inv -\$8m Accounting policies for revenue recognition won’t change the NATURE of the CF. The CF is allocated to the investment in a franchise. If the question referred to the purchase of a building and its depreciation. What would your answer be?

D. CFO goes up by the 8m that is no longer expensed and thus no longer in Net Income = 22m (no change for amortisation as it is not a cash payment) CFI goes down by 8m investment Total cash position before (as far as we know) = CFO = 14m Total cash position after = CFO + CFI = (22m) + (-8m) = 14m

BishBosh Wrote: ------------------------------------------------------- > But it is still an investment not an operating > expense. > > So the CF statement would show: > > CF from Ops +\$14m > CF from Inv -\$8m > > Accounting policies for revenue recognition won’t > change the NATURE of the CF. The CF is allocated > to the investment in a franchise. > > If the question referred to the purchase of a > building and its depreciation. What would your > answer be? My answer would be unchanged. If you purchase a building, it is CFI, if you have rent expense, it is CFO. “Total cash position before (as far as we know) = CFO = 14m Total cash position after = CFO + CFI = (22m) + (-8m) = 14m” Since the question asks what CFO would be (and not the change in total cash flow) then it should be 22.

Hoffmag. Correct on the building example. There is no fundamental difference between that and the treatment of this franchise investment. Perhaps you should read the Q again - it tells you that CFO is \$14m, not \$22m. The accounting choice for the franchise cost is a red-herring.

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.

when posting these questions, it might be smarter to post the answer the qbank or shcweser provide to avoid mixed opinions and thus help us all get to the answer alot smarter and more efficiently. otherwise, people will just say what their answers are, provide a completely bogus explanation that seems rational, and completely screw everyone else on the day of the test.