For a capital lease the total expense is equal to interest + depreciation. The cash outflow is made up of interest (CFO) and principal (CFF). What I am having trouble understanding is how there can be a outflow of cash as principal but no corresponding expense attached to it. Is anyone able to clarify?
Thanks
The cash outflow is the lease payment you are making. The CFF is NOT equal to the depreciation expense it is equal to the actual payment minus the interest portion of the payment.
Under a finance lease, when you initialy record the leased asset on your balance sheet, assets go up and a lease liability appears on the other side of the balance sheet (which is essentially the principal which you wrote about). When you pay this principal down, cash dissapears from assets and the liability gets reduced. No need to hit the income statement with it.
regards
Thanks Wojtek. Perfect answer!