hi there is an example given where a purchase is made of a franchise, its stated that the operating cash flow will be higher when the cost is capitalised if it had otherwise been expensed. my question is, isn’t a purchase of a franchise calcified under investing cash flow anyway? thus there is no change made to operating cash flow?
many thanks, this has caused me many issues.
Let’s assume the business paid $300k for the franchise.
If they decide to expense then:
CFO = -300k
CFI = 0
If they decide to capitalize then:
CFO = 0
CFI = -300k
So if you capitalize, the CFO would be higher (0k versus -300k)
hey thanks for your response.
Wouldn’t an investment in a franchise be considered a CFI? Why would an outlay for an investment (i.e franchise) be considered an operation cash flow?
Typically we would classify it as a CFI, but the example is comparing expensing vs capitalizing, so don’t overthink it.
Ah thanks a lot.
I spent the whole day trying to get to the bottom of it.
Much appreciated