Series 79 practice questionmediumFinancial Statement Analysis
If a company capitalizes a larger portion of operating expenses instead of expensing them, all else equal, which current-period profitability metric is most likely to increase?
- ANet income will decrease
- BCash flow from investing will increase
- CTotal liabilities will increase
- DEBITDA will increase✓ Correct answer
Explanation
Why D — EBITDA will increase
Capitalizing expenses increases EBITDA and net income (in the short term) since the cost is not fully expensed. Not recognizing this can lead to misinterpreting profitability.
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