CFA Practice Question

There are 534 practice questions for this study session.

CFA Practice Question

Cash flows from operations are higher when ______
A. costs are capitalized.
B. costs are expensed.
C. there is a gain from the sale of equipment.
Explanation: When costs are capitalized, they are recorded as a long-term asset. Consequently the cash flow shows up under cash flows from investing activities. Capitalization of interest is an example. Instead of being recorded as an interest expense, it is added to the cost of the asset being constructed. This causes the cash flow to be reported as an investing cash flow rather than an operating cash flow.

User Contributed Comments 5

User Comment
kalps Read the question, asks when are cash flows from OPERATIONS highest - answer would be correct as capitalised costs would be shown under cash flows from investing activities
plost capitalized cost: long -term asset. capitalization of interest is added to the cost of asset being contructed. (investing instead of operating)
ehc0791 I think the explanation meant higher OUTFLOW of investement, when expense becomes assets, CFO increases. The answer is correct !
smmahmood when cost is capitalized, then it forms an amortization schedule. under it, interest portion goes out of operating cash flow and principal portion from the financing cash flow. however, if cost is expensed then the whole cost is considered to be a rental and it goes out of operating cash flow only. so, operating cash flow would be lower in such case.
abeeman924 *cough*Enron*cough*
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