Implications for Financial Statements & Ratios of Capitalizing vs Expensing Long Lived Assets

Summary of new* reading in 2011– Implications for Financial Statements & Ratios of Capitalizing vs Expensing Long Lived Assets (longish…even after dividing chapter in 2 parts)

CFA Level 2 – Financial Reporting & Analysis

Study Session 5, Reading 22 in textbook

*(Like the last post, I am certain I have read some of this material before… and it was in 2009 Level 1 – reading 36 in SS9!)

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Terminology & Formula

1. I/S = Income Statement, B/S = Balance Sheet, C/F = Statement of Cash Flows

2. Ending shareholders’ equity = Beginning shareholders’ equity

+ Net income

+ Other comprehensive income

– Dividends

+ Net capital contributions from shareholders

3. Return on Equity (ROE) = Net Income ÷ Average Shareholder’s Equity

4. Interest Coverage Ratio = EBIT ÷ Interest Expense

5. Operating Income = EBIT = EBITDA – Depreciation – Amortization

6. EV/EBITDA = Enterprise Value ÷ EBITDA

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Capitalizing vs. Expensing

Source: Kaplan Schweser Level 1 Curriculum 2009

Adding few more items not in the above table…