- CFA Exams
- CFA Level I Exam
- Study Session 8. Financial Reporting and Analysis (3)
- Reading 26. Long-lived Assets
- Subject 1. Capitalizing versus Expensing
CFA Practice Question
Which of the following would an analyst need to adjust due to the capitalization of interest (assume U.S. GAAP)?
A. Cash flows from operations
B. Cash flows from financing
C. Current ratio
Explanation: Cash flows from financing, the current ratio, and the quick ratio are not affected by the inclusion of interest in the cost of assets. Cash flows from operations would need to be adjusted by a reduction in the amount of the interest capitalized.
User Contributed Comments 6
| User | Comment |
|---|---|
| murli | Under direct method. |
| danlan | CFI needs to be adjusted also. |
| 0000 | If capitalisation of interest affects CFO, wouldn't this also affect the quick ratio (cash+MS+AR/CL) |
| ThePessimist | The capitalization doesn't affect the total cash balance. The interest is counted against CFI instead of CFO, but is still paid in cash. |
| apiccion | Got this one wrong myself. The capitalized interest is not expensed therefore not included in the net income calculation. However, it is still an operating cash outlay. Interest payments are NEVER classified as financing outlays. The current ratio is not effected because the asset must be a long-term asset. (Recall you capitalized interest for the construction of *long-term* assets). The current ratio by definition does not include non-current (i.e. long-term) assets. |
| keitsuke | Interest expense can be classified as Financing cashflow under IFRS, in which case CFO does not need to be adjusted at all. |