Everyone, How are you remembering all the effects (to CFO, CFI, CFF, ratios) when something changes? FIFO => LIFO, capitalizing vs. expensing, capitalizing lease vs. operating lease. etc. I’m having problems remembering everything. Are there some tricks to use? I so far only can use these “guidelines” that doesn’t seem to get me very far. COGS FIFO < COGS LIFO and so with liability Inv. FIFO > Inv. LIFO and so with assets capitalizing is almost like increasing asset value, whereas operating and expensing are more like interest payments. and also, what are the effects to the other side of the equation? (in other words, A = L + SE, there’s some other account - sometimes net income changes, and sometimes it doesn’t as in a lease) Does anyone have a summary of all FSA effects? Thanks for all your help.
Creating a nonsenical acronym would help if you get desperate come next weekend… but meanwhile you may want to try understanding the relationship btw one side of the whole picture and reversing it for the other. eg. Cap Lease Assets - Higher -> ROA/ROE/Leverage ratios/Asset turnover Liabilities - Higher -> Lower Current ratio/NWC EBIT - Higher -> Net income higher (less interest) CFO - Higher (less interest) CFF- Lower (more principal) then you reverse it for Op Lease… Hope it helps…
I had FSA “click” after reading over and over and then looking at actual financials or in depth problems, and figuring out why or how ratios, etc. would change with different decisions. Looking at a problem for the first time might not make sense, but look through it enough and you will learn more than the problem teaches.
Could somebody explain the difference between capitalizing long-lived assets and a capitalizing a lease… (impacts on D/E and CFO)… Question: Compared to expensing the costs of long-lived assets, would capitalizing the coset inceras the firms: D/E Ratio CFO no no no yes yes no yes yes
When you capitalize an Asset – Asset is increased. since liabilities remain the same, Equity must increase to balance A=L+E. so D/E would reduce. CFO --> When you expense an asset --> Total cost is completely taken in the period. So CFO would be lower. However, when you capitalize it, NI would be higher - because the amount is only slowly bled off (in terms of depreciation) --> so CFO would be higher. Based on the above --> my answer would be D/E Yes, CFO No C
cpk… from reading your explaination i think you were meaning D/E increase : no CFO inrease: yes Ans. is B Thats right, so when you cap. a lease is that not considered a long lived asset? 4 post up “tsech” says Liabilites will increase when cap. a lease
Yes, when you capitalize a lease - there is a Liability increase - both current liab and long term liab. But here you are talking about capitalizing an expense. And this is precisely the kind of mistake like the above that I make… ouch that hurts. you do all the hard analysis, then select the wrong answer. When you capitalize a Lease: (as compared to an Operating Lease) For D/E: 1. Asset increases, Liability Increases so Debt increases. so D/E would increase (Numerator increases). For CFO: (OL=Operating, CL=Capital) Interest expense for the CL is only recorded on the CFO statement, while the entire Lease payment goes on the OL. And the entire expense would be bigger than the interest expense). So CFO would increase as well. So in the case of a Capital Lease: Yes/Yes would be the answer. CP
yeah your right… I got it now… I got confused there… Thanks
B. capitalizing cost adds it to Asset and Equity? And CFO would go up because ur putting the cost to CFI?