CFA CFA Level 1 Question of the Week – Financial Reporting

Question of the Week – Financial Reporting

  • This topic has 9 replies, 8 voices, and was last updated Jan-18 by thendry7.
  • Author
    Posts
  • exam_whiz
    Participant
    Up
    6
    Down

    Given the following data, determine the cash flow from operations (All figures are in $m):

    Sales = 2,100
    Increase in inventory = 200
    Depreciation = 125
    Increase in accounts receivable = 75
    Decrease in accounts payable = 70
    After tax profit margin = 35%
    Gain on sale of machinery = 30

    • $515m
    • $545m
    • $485m
    GeorgeKop
    Participant
    Up
    3
    Down

    Hope that’s correct!
    I made Net Income=0.35* Sales and calculated CFO via indirect method

    Alex_Dolson
    Participant
    Up
    5
    Down

    $515, the gain on the machinery sale would go into CFI right?

    RichG
    Participant
    Up
    4
    Down

    I voted 485 but now I think 515 is correct per Alex.

    GeorgeKop
    Participant
    Up
    2
    Down

    Ok,
    Let’s work this out.

    Net income = Sales*0,35=735
    -200(Increase in Inventory)
    +125(Depreciation which is a Non Cash Expense)
    -75(Increase in accounts receivables)
    -70(Increase in accounts payable)
    -30 (Gain on sale which is a Cash Flow from Investing)

    We get CFO = 485$

    exam_whiz
    Participant
    Up
    1
    Down

    Net income = 2,100 * 35% = 735

    Cash flow from operations = Net income + Depreciation (Non cash expense does not incur actual cash outflow) – Increase in inventory (increase in asset is a cash outflow) – Increase in accounts receivable (increase in asset is a cash outflow) – Decrease in accounts payable (decrease in liability is a cash outflow) – Gain on sale of machinery (using the indirect method non-cash income statement items must be adjusted for).

    Therefore, cash flow from operations = 735 + 125 – 200 – 75 – 70 – 30 = $485m

    joe240
    Participant
    Up
    0
    Down

    Indirect method
    Net Income -> Adjustments -> CFO.
    Since, Net Income includes any CFF and CFI, they need to be adjusted as well to get CFO.
    Therefore, subtract the gain on sale of land as CFI.
    You’re right that it’s CFI Alex, but it still needs to be subtracted…

    so 485 is correct.

    Any holes in my thinking?

    SamirHasanov
    Participant
    Up
    2
    Down

    joe240 you’re right 😉

    shannondaily
    Participant
    Up
    4
    Down

    Woo! I got it right. 🙂 

    thendry7
    Participant
    Up
    0
    Down

    Answer is A, the gain on sale of equipment is already picked up in the calculation of after tax profit margin. This is not a CFI item.

Viewing 10 posts - 1 through 10 (of 10 total)
  • You must be logged in to reply to this topic.