a)
It is permissible. FASB ASC 835-20-05, ASC 835-20-05 provides that interest should be capitalized into assets’ costs for assets that meet a certain pre-set criteria.
b)
The objective of capitalizing interest rate is to ensure that the value of an asset that represents the full investment made in acquiring the asset and to charge the full cost of acquisition of the given resource that will provide future benefits against the revenues of the respective periods.
c)
There are various assets that qualify for capitalizing interest rates.
Assets that an entity constructs or produces for its use either by the entity or by other entities on behalf of the firm
Assets that are produced or constructed with the intention of selling or leasing
Investments that are accounted for using the equity method where the investee has activities that are in progress which is necessary for the commencement of its planned key operations as long as the investee activities include using the funds to acquire assets that are fully qualifying for its operations.
d)
The amount of interest that can be capitalized is limited. FASB ASC 835-20-30-6 provides that the amount of interest cost that can be capitalized should not be more than the interest cost that was incurred by the entity in the period in which the interest is capitalized. In the case of consolidated accounting, it shall be applied to the interest incurred by the parent entity and its subsidiaries.
e)
There are two main disclosures for capitalized interest.
In the period in which there was no interest that was capitalized, the interest cost that was incurred during the period should be disclosed.
In periods when interest cost is capitalized, the total interest cost and the portion that was capitalized should be disclosed.
Financial Statement Analysis Chapter 10
a)
Building and Building equipment cost was $ 9,389 as at 2009 financial year-end.
b)
The company uses a straight line method of depreciation for all additions to PPE as revealed in the footnotes. Straight line method results in a lower depreciation charge in comparison to an accelerated method of depreciation in early years of an asset acquisition. Therefore, the entity uses a liberal method.
c)
The interest expense that was actually paid was 576 dollars as indicated in the cash flow statement. The interest expense that was reported in the income statement was 571 million dollars which was net of 84 million dollars of interest that was capitalized. Therefore, interest cost that was actually incurred was 655 million dollars.
d)
Free cash flow are the net cash flow of an entity and is computed by subtracting capital expenditure and dividends from cash flow from operating activities.
The company has considerable amount of free cash flows. Therefore, the company enjoys flexibility. For instance, it can use the funds to finance viable investment projects instead of borrowing funds. The company can comfortably pay shareholders dividends. The company can even expand operations without resorting to raising equity or debt finances.
Financial Statement Analysis Chapter 11
a)
McDonald employs a straight line depreciation method for its property, plant and equipment.
b)
Amortization and depreciation are non-cash flow items. Therefore, they do not increase cash flows from operations. The two items are added back to the net income in a cash flow statement to obtain cash flow from operations. This is because the two items are expensed reducing the net income yet they do not represent an actual outflow of resources out of the firm. Therefore, someone can incorrectly conclude that because they are added back to the net income they increase cash flows. It is only actual cash revenues and cash expenses that affect cash flows. Non-cash expenses have no impact on the cash flows statement other than the fact that they provide a tax shield benefit which reduces tax expense. Tax expenses is a cash expense. Therefore, non-cash expenses only contribute indirectly and not directly to the increase or decrease of an entity’s cash flows.
c)
Cash flow statement indicates that cash provided from a firms operations is expected to cover the capital expenditure of the entity over the next few years and allows expansion of the firm in order to enhance revenue generation capacity. McDonald believes that cash flow measures are useful indicators of financial strength as well as growth when they are evaluated in terms of absolute dollars or in terms of percentages. Besides, cash flow statements can be used for planning purposes. In case there cash flows from the firm’s operating activities are not enough to finance capital expenditure then measures can be taken to raise additional funds from equity or debt. However, in case there cash flows from the firm’s operating activities are more than enough to finance capital expenditure then measures can be taken to invest the surplus funds.
