CFA CFA Level 2 CFO calculation from CFAI topic exam

CFO calculation from CFAI topic exam

  • This topic has 10 replies, 4 voices, and was last updated Sep-18 by googs1484.
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  • googs1484
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    Good day,

    Not sure if anyone has taken this topic exam for FRA from CFAI site or not but in one question they calculated CFO as CFO= sales-fixed expenses-variable expenses+ depreciation tax shield. Does that make sense to anyone? Those expenses do not necessarily mean they were cash flows.

    googs1484
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    I just do not understand where the adjustments are for working capital and such.

    sam_hoosier
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    Which exam is this?

    googs1484
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    If you go to the Corporate Finance topic exams and take the item set for ENGLAND; it is question number 1. It is asking for the after tax operating cash flow, which to me means CFO. Apparently I was mistaken.

    LeChiffre
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    @googs1484, which reading is that? If I recall the Schweser video had a nifty way of remembering how to derive CFO.

    ec_test
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    Hello there,

    Cash Flow from Operations (CFO) = Sales- Fixed expenses- Variable Expenses + Depreciation Tax Shield is correct indeed.

    The Schweser Books provide the formula in the following ways which could be helpful depending on the information you get in the vignette.

    CFO= (Sales – Cash Expenses – Depreciation) x (1-Tax Rate) + Depreciation
     or
    CFO= (Sales – Cash Expenses) x (1-Tax Rate) + (Depreciation x Tax Rate)

    Cash Expenses – Include both fixed and variable expenses.

    The problem will always tell you whether the fixed and variable expenses were incurred in cash or credit. My perception, out of having done multiple practice problems, is that if the problem does not specify if the fixed and variable expenses were paid in cash, you just assume they were paid in cash.

    I hope this helps.

    ec_test
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    “If you go to the Corporate Finance topic exams and take the item set for
    ENGLAND; it is question number 1. It is asking for the after tax
    operating cash flow, which to me means CFO. Apparently I was mistaken.”

    I’m sorry I answered the wrong question above. The reason CFO is different from the “after tax operating cash flow” is that the CFO is before taxes and the question asked you to calculate after-tax operating cash flow.

    Here is the calculation:

    CFO minus Non Cash Items = Earnings Before Taxes (EBT)

    Non Cash Items could be Depreciation and/or Amortization.
     
    EBT – Income Taxes + Non Cash Items= After Tax Operating Cash Flow.

    googs1484
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    I think your first explanation made more sense to me about assuming the expenses are cash. CFO is after tax, depending in IFRS or gaap, those taxes may be classified as CFI, CFF, or CFO.

    googs1484
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    I’m finding the cfai topic exams rather difficult. Anyone else in same boat?

    LeChiffre
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    @googs1484, how do they compare to the EOC questions? I have found EOC questions to not be unreasonably difficult, not a cakewalk either. Probably around 60-something percent on EOC questions.

    googs1484
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    I am saving most of the EOC’s for refresher stuff closer to the exam date. Probably do them all in April just prior to going to Windsor Week so I can go over trouble spots in tutoring sessions. I do not think they are “difficult” but I guess the way they interpret something is often different than how I interpret it. And we all know CFAI doesn’t care what how we think it should be interpreted haha. I was often getting 3/6 or 2/6 on the item sets off the website which to me is extremely uncommon and rare to see which makes me nervous. I just need to review all the material 2-3 more times and familiarize myself with how CFAI approaches questions because the Qbank questions and CFAI questions are quite different in my opinion.

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