CFA Practice Question

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CFA Practice Question

Expensing rather than capitalizing R&D costs results in lower ______.

I. income in subsequent periods
II. investment cash outflows in the current period
III. net operating cash flows in the current period
Correct Answer: II and III

Expensing R&D costs lowers income in the current period.

User Contributed Comments 11

User Comment
cong II: Had capitalizing been used, investment cash outflow would be hired as the expense is reported as an investment outflow.
rhardin I thought cash had nothing to do with this... From the notes: "Everything other than cash is the result of choice." Which includes the choice of expensing or capitalizing. I knew net income would be lower, but not cash flows. Can someone please help explain? Thanks!
jansen1979 It depends on the classification of the cash flows.
rocyang II should be incorrect! It is said in the notes that cash expenditures for expensed outlays are included in CFO and never classified as CFI.
cfaajay Expensing will surely lower the operating cash flows so option iii is correct ,,also if capitalized the investing cash outflow would have increased but as expensed the investing cash "outflow" will decrease so ii is correct to. .
mattyg My logic sides with rocyang on this one. To qoute the notes " A capitilized expenditure reported on CF statement is an outflow from investing activities. Expensing expenditures is an outflow from op. activities and capitilizing will lower investment cashflows.THerefore capitilzing expenditures will have lower ICF and higher OCF compared to expensing" I am going with only option 3 on this one.
cfaajay Just remember capitalizing will ask for investing cash outflow..if you are expensing you are saving on investing cash outflow at the cost of operating cash outflow.
cfaajay If capitalizing higher "OUTFLOW" ,if not lower "OUTFLOW" .if expensing higher outflow of CFO and thus lower operating cash flows...
business note (iii) relates to OUTFLOWS and (ii) relates to "NET" CASHFLOWS. Therefore Analystnotes is correct.
Shaan23 Yup Anal notes is correct. Tricky wording.
GBolt93 business, I think you have the numbering backwards, but correct idea.
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