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
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.
“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.
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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