Capitalizing Interest

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dan5342

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Under GAAP rules regarding capitalized interest it is my understanding that in the period the interest is capitalized it should be a CFI outflow and not a CFO outflow…is this correct? The reason I ask is because I am currently reading the annual report below in which there is a cash outflow from CFO due to “Capitalization of interest” and this is confusing me.
http://www.sec.gov/Archives/edgar/data/1385544/000138554414000006/zinc-20140331x10q.htm
Thanks for any help in advance!
 
Yes, it should be a CFI outflow. I don’t understand why ZINC includes it in CFO.
 
Regarding EOC Curriculum reading 16 (LLA) no 8.
Jordan’s response decision to capitalise interest cost will :
1. Lower Fixed Asset TO ratio
2. Higher Interest Coverage ratio
Most likely correct statement regarding :
A. interest coverage ratio
B. Fixed asset TO ratio
C. Interest coverage & Fixed asset TO ratio
Ans : B
So, if we change Jordan’s response to be :
1. Lower Fixed Asset TO ratio
2. Lower interest coverage ratio
The answer will be : C
Am i correct about this?
Thanks
 
Capitalizing interest increases EBIT and lowers Interest Expense in the first year so it results in a higher interest coverage ratio.
In subsequent years, capitalized interest results in a lower interest coverage ratio as the capitilized interest hits depreciation and reduces ebit
 
Blue box example 3 > Solution to 1 > in 2006 = 15.77 without adjusting for capitalized interest. this looks at the numbers where the firm has already capitalized interest and hasn’t made a change.
So when it says without adjusting for capitalized interest - the capitalized interest is included interest coverage ratio making the ratio higher
It looks like the ratio which includes an adjustment to EBIT is looking at the IC ratio assuming you did not previously capitalize interest.
 
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