A company spent $5000 to install a new theft-detection system in its headquarters. Management wasn’t sure whether this cost should be capitalized to the Buildings account or expensed immediately. The CFO flipped a coin, it came up tails, so the company expensed these costs immediately.

This transaction will reduce Cash and increase Maintenance Expense, instead of increasing Buildings. Thus, stockholders’ equity will be decreased (the maintenance expense will be greater than the extra depreciation expense). The cash outflow will be considered Operating; so Cash from Operations will decrease. If the CFO had capitalized the cost, it would have been an Investing cash flow. By moving the cash outflow from Investing (capitalizing) to Operating (expensing), Cash from Investing Activities will be increased.

This transaction will reduce Cash and increase Maintenance Expense, instead of increasing Buildings. Thus, stockholders’ equity will be decreased (the maintenance expense will be greater than the extra depreciation expense). The cash outflow will be considered Operating; so Cash from Operations will decrease. If the CFO had capitalized the cost, it would have been an Investing cash flow. By moving the cash outflow from Investing (capitalizing) to Operating (expensing), Cash from Investing Activities will be increased.