1.Long lived assets capitalizing records in BS and P/L
Assume given level debt to equity f.ex 50:50
Equity = net assets, thus assets - liabilities (debt)
1. method, capitalizing assets - increases total assets while period expenses still remains on same level, thus net earnings not affected with additional expenses in 1st year
thus in primary equation equity weight increases to givel level of debt.
Interest Cvrg in 1 st year is higher regarding the net earnings effect mentoined above.
2. method, expensing assets, purchase of assets are shown in P/L as just operating expense, thus net earnings in this (1st year) are lower, total assets remain on same level as prior purchasing and consequently just opposite to capitalizing debt/equity is higher and int.cvrg is lower in 1st year.
In next periods, due to assets depreciation effect, in 1st case (capitalizing) impact to both ratios are opposite assuming all else remain equal.
So, capitalizing assets sometimes may be used as a creative accounting method to hide or deffer expenses and thus losses (ex. Worldcom case and many others), and management can make decissions of exact timing of expressing such expenses or at the other side make so called hidden reserves. To avoid likelihood of manipulations, this is the area strictly regulated by GAAPs.