Question

QUESTION 16

1. How many of the following statements is true?
   1. Expensing costs that are capitalizable cause cash flow from operations to be lower and cash flows from investing activities to be higher.
   2. Expensing costs that are capitalizable cause interest coverage in the first year to be lower and interest coverage in subsequent years to be higher
   3. Expensing costs that are capitalizable cause the debt ratio and the debt-to-equity ratio to be lower.

	a.	None
	b.	One
	c.	Two

Answer 1

How many of the following statements is true?

Expensing costs that are capitalizable cause cash flow from operations to be lower and cash flows from investing activities to be higher.

TRUE

Capital expenses are part of investing activities. It reduces cash flow from investing activities. If these are shown as operating expenses the cash flow form operations will decrease while cash flow form investing activities will be higher.

Expensing costs that are capitalizable cause interest coverage in the first year to be lower and interest coverage in subsequent years to be higher

TRUE

Interest coverage Ratio is the ratio of interest paid to Earnings before interest and taxes. If the capitalization costs are expenses as operating cot EBIT will decrease so the ratio will decrease too.

Expensing costs that are capitalizable cause the debt ratio and the debt-to-equity ratio to be lower.

FALSE

If the costs are not capitalized then assets will be on lower side. So debt ratio will be on higher side.

If the capitalization costs are expensed as operational then equity will be on lower side. So debt to equity ratio will be on higher side.

So answer is Option C as Two of them are true.