CFA CFA Level 1 CFA Level 1 Question of the Week: Financial Reporting and Analysis

CFA Level 1 Question of the Week: Financial Reporting and Analysis

  • This topic has 5 replies, 4 voices, and was last updated Jan-18 by exam_whiz.
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    • exam_whiz
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      A company with a net income of $55,000 is looking to compile its operating cash flows for the period using the indirect method. Over the course of the year, the company saw $8,000 in depreciation, an increase in deferred tax assets of $750, increase in accounts receivables of $850, increase in inventories by $350, and an increase in accounts payables of $350. What is the company’s operating cash flow for the year?

      • $63,900
      • $62,200
      • $62,900
    • exam_whiz
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      There is an error on the multiple choice options..
      A:  $61,400
      B:  $62,200
      C:  $62,900

      Sorry gang!

    • RoyD
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      Yes 61,400 is the correct answer.

    • aylouis13
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      So I minus the deferred tax asset from the net income as it doesn’t have an associated cash flow. Is this correct? And in this situation a deferred tax liability would be added on?

    • ufsguy
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      55,000 + 8,000 – 750 -850 -350+350 = 61,400

    • exam_whiz
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      Correct Answer:  A ($61,400)

      The trick to solving this sort of problem is to visualize how each adjustment changes the company’s cash for the year. An increase in AR means that the company is not receiving cash from its customers for revenues, and therefore reduces cash flows from what is reported in net income. The total calculation is as follows:

      Net Income + Depreciation – Inc DTA – Inc AR – Inc Inv + Inc AP

      $55,000 + $8,000 – 750 – 850 – 350 + 350 = $61,400

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