If a Company Decides to Capitalize an Expenditure as an Asset

question 85

Multiple Choice

If a company decides to capitalize an expenditure as an asset instead of expensing it, what is the effect on the cash flow statement in the year of the expenditure?
$\begin{array}{ll}&\text { Cash from } & \text { Cash from } \\&\text { Operations } & \text { Investing Activities }\\\hlineA.&\text { Higher } & \text { Higher } \\B.&\text { Higher } & \text { Lower } \\ C.&\text { Lower } & \text { Higher } \\ D.&\text { Lower } & \text { Lower }\end{array}$

• A)Option A
• B)Option B
• C)Option C
• D)Option D

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Definitions:

Absorption Costing

An accounting method that includes all of the costs associated with manufacturing a product in the cost of that product.

Operating Income

Earnings before interest and taxes (EBIT), a measure of a company's profitability from its operations.

Variable Costing

An accounting method that assigns only variable production costs to products, treating fixed costs as period costs.

Absorption Costing

An accounting method that includes all manufacturing costs (fixed and variable) in the cost of a product.