CFA Level I · CFA Level I Exam · Analysis of Long-Term Assets
Compared with a company that expenses an outlay, a company that capitalizes an otherwise identical outlay will most likely report, in the year of the expenditure:
The capitalizing company reports higher operating cash flow and lower (more negative) investing cash flow. Capitalized spending is classified as an investing outflow, whereas expensed spending reduces operating cash flow. Total cash flow is the same; only the classification and reported profit differ between the two treatments.
- Alower operating cash flow and higher investing cash flow
- Bhigher operating cash flow and lower investing cash flowCorrect
- Cthe same operating cash flow and lower profit
Explanation
A capitalized cost is classified as an investing outflow, while an expensed cost reduces operating cash flow. So the capitalizer shows higher operating cash flow and a more negative investing cash flow. Total cash is identical. Profit is higher, not lower, for the capitalizer in that year.
Did you get it right without looking?
One question tells you little. A timed set on Analysis of Long-Term Assets shows your real accuracy, how long you take and where you lose marks.
More Analysis of Long-Term Assets questions
- An analyst notes that a company reported a large gain on the sale of equipment in operating profit, and the company is not in the business o…
- Under IFRS, which of the following costs incurred by a manufacturer on a newly purchased machine is most likely capitalized as part of the m…
- A company reports PP&E (in $ millions): gross 1,200, accumulated depreciation 480, annual depreciation expense 100. The estimated remaining …
- A company reports the following PP&E data (in € millions): gross PP&E of 800 and accumulated depreciation of 320. Annual depreciation expens…
- Compared with an otherwise identical company that developed its brands internally, a company that acquired its brands in a business combinat…
- Company A acquires 100% of Company B for €900 million in cash. B's identifiable assets have a fair value of €1,000 million and its liabiliti…