CFF -amortized lease payment

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Dsylexic

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Do the amortized capitalized lease payments have be included in calculating CFF.

And also, once again,why would change in depcn methods not affect cash flows/CFO? -it should affect taxes paid, correct?

I am going thru SS7 and it is beginning to give me a headache.

thanks for your replies.



Edited 2 time(s). Last edit at Saturday, June 9, 2007 at 05:55AM by Dsylexic.
 
I am also curious to know the answer to your first question. My intuition tells me that it will depend on the circumstances of the lease. On one hand, having the lease capitalized essentially means that it has been "invested" in and so any payments should go under investing cash flow. But on the other hand, if the fair value of the leased asset is X, but you are paying a present value of Y (where Y>X) for the lease, then I would think that the extra Y-X amount would go under financing, and X would go under investing.

As for your second question, the reason that depreciation methods does not affect cash flow (at least now for the current period) is that actual taxes to be paid are not calculated based on accounting net income but instead are calculated based on the government's own methodology. (for example, the company may choose to use double declining balance for financial reporting purposes, but are mandated to use straight line depreciation for tax reporting purposes).
 
doubled,

re. my second question: I was actually asking if choice of depcn methods affects cash flows. suppose a company follows st line method in its financial statemts, then it would totally different tax outflows in the current year as compared what it has to pay in case it chose accelerated depcn for its fin. statement.

agree that the tax discrepancy will vanish (temporary differnce) over a period -thanks to deferred tax expenses catching up .but i am confused what the answer is right for the exam for a question that asks: Does choice of depcn methods affects cash flows.?

one could lean either side depending on the time period under consideration -
please comment.

thanks


>>>> i think i figured it out: the govt will want you to stick to one method (MACRS) for tax purposes.so taxes dont have a reason to change.



Edited 1 time(s). Last edit at Sunday, June 10, 2007 at 01:34AM by Dsylexic.
 
I am on FSA as well. It sure gives me a hard time as well. I have no finance backgroud. So everything I learned in just a few weeks or so. So please correct me if I am wrong.

Are you talking about direct method or indirect method? For direct method, there is no
real cash outflow or inflow for depreciation.
So it is not a factor in calculation for cash flow. On official book page 369-371, you do have a choice of depreciation for tax purpose. So the choice of depreciation methos does impact income tax.
 
sigh .this is so confusing. i searched thru a few posts from the past on this topic...it seems to be an irritant every year with numerous discussions spread across 2005-2007.

my current understanding (after a bit of googling) is : cf is affected by choice of depcn -but its effect reverses over the lifetime of the asset.

not that this helps in answering questions on the exam.

i am a non finance person as well -so please do not take the above as gospel.

i am sure Super I, if he is not irritated by same questions year after year, will hopefully clear this confusion.or perhaps any other accounting champs on AF?
 
I agree. If tax rate stays same, the overall effect is same across years. But on a CF statement, it should show different number each year.

There is an example of tax rate change in second year in CFA book, tax paid are indeed different in that case.
 
Dsylexic, to your point regarding Cash flow and a change in depreciation. You can change your depreciation method all you want for financial reporting and it shouldnt affect your cash flows. But as you said, if you do change it for tax reporting purposes, it will have an impact. But I think that changing depreciation methods for tax reporting purposes is not very common.

As for the capitalized lease, assuming you are looking at it from the point of view of a lessee (someone who leased the asset from another company), your cash flow statement is hit two fold. First, a portion of the lease payment is interest expense, so your CFO will be lower. Second, the remaining portion of your lease payment is principal, so your CFF will be lower as well. When i say lower, i mean vs. not leasing an asset at all. However, if you are comparing it to an operating lease, your CFO will be higher under a capital lease (due to a portion of the cash outflow being classifed as CFF). For an operating lease, the entire lease payment is subtracted from CFO.

Not sure if i helped or hindered.
 
All agrees. For me, I think the key is that for capital lease, it is counted as debt on balance sheet. And repaying debt(pricipal) belongs to CFF. And interest payment belongs to CFO.
 
ok. great, thanks guys.

one more question: what is the diff between marketable securities and tradable securities? (if any). tradable securities purchase/sale is counted in CFO.and marketable securities?...

thanks again
 
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