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.
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• exam_whiz
Participant

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

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

Alex_Dolson
Participant

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

RichG
Participant

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

GeorgeKop
Participant

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

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

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

joe240 you’re right 😉

shannondaily
Participant

Woo! I got it right. 🙂

thendry7
Participant

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.

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