Re: Capitalizing vs Expensing Interest
I think I understand. So what you're saying is that in any given fiscal period, the cash flow may not be the same for both scenarios (capitalize and expense) but in the lifetime, so to speak, of the interest the cash flows will ultimately be the same.

Re: Capitalizing vs Expensing Interest
[quote="wsthost":2xqvvb6q]the offsetting entries would be deferred taxes. remember, the sum of expensing (interest expense) and capitalization (interest + depreciation) must be all the same at the end. so, how it's allocated in the interim years is irrelevant as long as they all add up. [b... [quote="wsthost":2xqvvb6q]the offsetting entries would be deferred taxes.
remember, the sum of expensing (interest expense) and capitalization (interest + depreciation) must be all the same at the end. so, how it's allocated in the interim years is irrelevant as long as they all add up. [b:2xqvvb6q]taxes are paid based on cash revenue and expenses and thus, deferred taxes are created to balance everything, [/b:2xqvvb6q]such that the final cash $ out each year remains constant. hence, the cash flow statement is the great equalizer, since no matter what accounting methods are used, the cash flow is always the SAME![/quote:2xqvvb6q]

Sorry for the confusion, but is there any way you can numerically demonstrate how deferred taxes play into this? I would like to fully understand how this works since Dean Choi does not mention deferred taxes in this part of the lecture so it is a bit foreign to me. Are you saying that taxes are affected by revenues and expenses that occur with actual cash exchange, whereas taxes affected by revenues and expenses that are non-cash (e.g. depreciation) are rolled into a deferred tax category? Read More

Re: Capitalizing vs Expensing Interest
Yes, correct. Taxes paid are always based on revenues and expenses recognized by the IRS. Deferred taxes will reconcile the difference between the tax treatment and the accounting treatment. Since some companies elect to be a cash basis taxpayer and others accrual basis taxpayers, it is not possi... Yes, correct.
Taxes paid are always based on revenues and expenses recognized by the IRS. Deferred taxes will reconcile the difference between the tax treatment and the accounting treatment. Since some companies elect to be a cash basis taxpayer and others accrual basis taxpayers, it is not possible to generalize on this. However, the cash flow statement will always reflect the actual cash taxes paid and the deferred tax item will always appear as an add back or deduction from net income. Read More

Re: Enhancements to the core model - Part II tax schedule
Yes, correct. Except that technically DTA and DTL changes are not part of working capital - they usually fall under "non-cash items". Still under CFO category, but below NI, above working capital. Remember, anything that changes on the BS must change somewhere on the CFS.

Liabilities and Interest Expense
In the "Financial Statement Analysis" video, he says that we should only include "Interest-Bearing Negotiated Securities" (IBNS's) as Liabilities in the A=L+OE equation because we are only interested in capital structure. My first question is why are IBNS's any different from ot... In the "Financial Statement Analysis" video, he says that we should only include "Interest-Bearing Negotiated Securities" (IBNS's) as Liabilities in the A=L+OE equation because we are only interested in capital structure.

My first question is why are IBNS's any different from other debt and debentures? If I issue a bond or note to raise $100k and use it to buy equipment, how is that different from going to a leasing company to finance the same $100 of equipment? (other than the first scenario produces a debenture that has claim on all the assets of the business in the event of default)

Do they not both equate to capital structure in the sense that they both financed PP&E for the company?

My second question is: assuming that we are only supposed to include IBNS's in the liabilities, does that mean the line item for interest expense on the Income Statement should only include interest relating to IBNS's?

If not, how do we resolve the difference between only having IBNS's on the BS and all interest on the income statement?

If so, please explain why? and where then would the other debt or debenture income and expense be posted on the income statement?

Thanks
Rick Read More