[MustPass1988]

I’m slightly confused with capital leases in regards to cash flow statements. In one question, they ask how monthly lease payments for a capital lease should be reported for the financing activity section of the CF statement and the answer is “as an outflow equal to the principal payments”. In another question, it says that the increase in capital lease payable should only be included in the disclosures.

I’m not sure when to include them in the financing section and when to only disclose them. Any help would be appreciated!

AUD: PASSED [81]; Expired, retaking August 23rd
BEC: PASSED [83]; Expired, retaking July 11th
REG: PASSED [83]
FAR: FAILED [64]; Retaking May 23rd

[stoleway]

Assuming you sign up for a Capital lease for $10,000 but there was no initial payment involved. The $10,000 becomes a liability but since this money(debt) wasn't given to you by the lessor, we will recognize this as Non Cash Financing activity.

This cannot be reported on your cashflow, it has to be disclosed.

Having a Capital Asset in place as a result of this transaction will also be recognized as a Non cash Investing activity which should also be disclosed.

In summary, signing up a capital lease without paying anything at the contract date will be considered as a Non Cash Financing and Investing activity.

Payment of the leases principal in subsequent years will be considered as a Cash used for financing activity.

hope this helps.

REG -63│ 84!!
BEC- 59│70│ 71 │78!
AUD- 75!
FAR- 87!

Mass-CPA

[stoleway]

Assuming you sign up for a Capital lease for $10,000 but there was no initial payment involved. The $10,000 becomes a liability but since this money(debt) wasn't given to you by the lessor, we will recognize this as Non Cash Financing activity.

This cannot be reported on your cashflow, it has to be disclosed.

Having a Capital Asset in place as a result of this transaction will also be recognized as a Non cash Investing activity which should also be disclosed.

In summary, signing up a capital lease without paying anything at the contract date will be considered as a Non Cash Financing and Investing activity.

Payment of the leases principal in subsequent years will be considered as a Cash used for financing activity.

hope this helps.

REG -63│ 84!!
BEC- 59│70│ 71 │78!
AUD- 75!
FAR- 87!

Mass-CPA

[Anonymous]

Great explanation! Thanks Stoleway.

I would like to clarify though, signing up a capital lease without paying falls under BOTH (?) noncash FINANCING AND INVESTING activity (or?) activities?

[Anonymous]

Great explanation! Thanks Stoleway.

I would like to clarify though, signing up a capital lease without paying falls under BOTH (?) noncash FINANCING AND INVESTING activity (or?) activities?

[stoleway]

@Amor D

Yes,

1. Having the long lived asset without any cash outflow makes it a NON CASH INVESTING ACTIVITY

2.The fact that you incured a debt without any cash inflow makes it a NON CASH FINANCING ACTIVITY

In summary you invested in Depreciable asset whilst someone else is financing this asset through debt but cash was not involved.

REG -63│ 84!!
BEC- 59│70│ 71 │78!
AUD- 75!
FAR- 87!

Mass-CPA

[stoleway]

@Amor D

Yes,

1. Having the long lived asset without any cash outflow makes it a NON CASH INVESTING ACTIVITY

2.The fact that you incured a debt without any cash inflow makes it a NON CASH FINANCING ACTIVITY

In summary you invested in Depreciable asset whilst someone else is financing this asset through debt but cash was not involved.

REG -63│ 84!!
BEC- 59│70│ 71 │78!
AUD- 75!
FAR- 87!

Mass-CPA

[Author]

Replies