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Question of the Week – Financial Reporting

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  • This topic has 9 replies, 8 voices, and was last updated Jan-18 by thendry7.
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  • exam_whiz
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    Forum Level 3 Sr Associate
    10 Oct 2017 at 12:44 pm
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    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
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    Forum Level 1 Summer Associate
    10 Oct 2017 at 6:36 pm
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    Hope that’s correct!
    I made Net Income=0.35* Sales and calculated CFO via indirect method

    Alex_Dolson
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    Forum Level 1 Summer Associate
    11 Oct 2017 at 8:22 am
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    $515, the gain on the machinery sale would go into CFI right?

    RichG
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    Forum Level 1 Summer Associate
    12 Oct 2017 at 9:27 pm
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    I voted 485 but now I think 515 is correct per Alex.

    GeorgeKop
    Participant
    Forum Level 1 Summer Associate
    12 Oct 2017 at 10:23 pm
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    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
    Forum Level 3 Sr Associate
    13 Oct 2017 at 6:35 pm
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    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
    Forum Level 1 Summer Associate
    14 Oct 2017 at 10:25 am
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    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
    Forum Level 1 Summer Associate
    15 Oct 2017 at 1:17 am
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    joe240 you’re right 😉

    shannondaily
    Participant
    Forum Level 1 Summer Associate
    25 Jan 2018 at 6:41 pm
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    Woo! I got it right. 🙂 

    thendry7
    Participant
    Forum Level 1 Summer Associate
    25 Jan 2018 at 11:13 pm
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    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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