The effects on a firm’s financial statement in the
The effects on a firm’s financial statement in the initial year when cost of an asset is expensed rather than capitalized are:
A. Pre-tax cash flow is lower and the debt-to-equity ratio is higher.
B. Pre-tax cash flow remains the same and the debt-to-equity ratio is lower.
C. Pre-tax cash flow remains the same and the debt-to-equity ratio is higher.
参考解答
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2024-11-15 00:16:23
Ans:C
Pre-tax cash flow stays the same because depreciation (or amortization) is a non-cash expense.
However, when the cost is expensed rather then capitalized, net income and retained earnings are lower, resulting in a lower equity. So the debt-to-equity ratio will be higher.
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