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Which of the following would be an effect of capitalizing interest costs? I). Depreciation is understated. II). Interest coverage would be understated. III). Cash flows from investing are understated. IV). Cash flows from operations are understated.
Correct Answer: B
Depreciation is overstated (interest is included in the cost of the asset); interest coverage is overstated (interest expense is too low); and cash flows from operations are overstated (not enough interest has been deducted). Cash flows from investing are understated, as the interest expense has been included in the cost of the asset.