Lease Interest Paid--what's with the shift?

CFA Level II
#1

Hi Guys,

I’m looking at Reading 18, Example 11, page 89. It’s a lease payment that’s being caclulated. For the 1st answer where we had to find the Net Income, the interest expenses were paid in years 1, 2, and 3, and for year 4, there was no interest expense. That’s fine.

For question 2, where we have to find the Operating Cash flow and Investing cashflow, suddenly, the same interest values have ‘shifted to the right’ where year 2, 3, and 4, have the interest values and this time year 1 has no interest expense.

Any idea why this is happening? Does this have to do with the cashflows? I’m confused because, since the lease payments are being made in the BGN of the years, the cashflow shouldn’t change.

Any help would be appreciated.

Thanks!

#2

When the lease payments are made at the beg of the year, the first payment is 100% principal (hence it is classified as cash flow from financing activities). During subsequent years, each lease pmt will have interest and principal portion included in the payment. For the last year, there is no interest “expense” but the prior year’s interest exp gets actually paid.