Plant Hire Ltd has been in business for one year.The company makes it a practice to capitalise a portion of its advertising costs as a 'deferred asset' and to amortise them at 25 per cent per annum.The accountant has suggested to the general manager that the amount should be expensed rather than capitalised because the economic benefit of the expenditures is not clearly determinable.The amount of advertising capitalised this year was $100 000.
-What effect would such a policy change have on cash flow from operations?

Question

Quizplus · Accepted Answer

Expensing advertising costs instead of capitalizing them affects the income statement by increasing expenses, but it does not affect cash flow from operations because both capitalizing and expensing are non-cash accounting entries.

Plant Hire Ltd Has Been in Business for One Year