AuthorTopic: Cash flow problem
@2012-04-21 08:17:06
Hi all! I have a problem solving a cash flow problem. Please help me If you can. I think that my calculations are correct. Here is the problem:
The following information should be used according to the provisions of SFAS 95 (Statement of Cash flows) and using the following data.
Net Income $50,000
Provision for bad debts $2,000
Increase in Inventory $1,000
Increase in accounts payable $2,000
Purchase of new equipment $15,000
Sale of equipment for $10,000 gain $20,000
Depreciation expense $5,000
Repurchase of common stock $10,000
Payment of dividend $4,000
Interest payment $3,000
My calculations are as follows:
CFO= 50 000 + 2000 - 1000 + 2000 - 10 000 + 5000 - 3000= 45 000 the correct answer according to the sofware I am using is 48 000. Why they are not deducting the interest expence?
The CFI and CFF here are clear.
The second question is what is the change in cash.
Their calculations are:
50 000 - (-1000 + 2000 -15 000 + 20 000 -10 000 - 4 000 - 3 000)= 39 000 ??? Now they are dedecting the interest expence but not adding back the depreciation and the provision for bad debt?!?!
I thing that the change in cash is 45 000 + 5 000 - 14 000 = 46 000
So who is wrong here? Please help! :)
@2012-04-22 23:44:41
When there is no other information, interest payment = interest expense, thus already accounted for in net income. The answer would have been different with some increase or decrease of accrued interest.
@2012-04-23 02:13:21
Forget about my previous reply. I checked my books, and the correct answer is that, under the indirect method, amounts of interest paid and income taxes paid during the period are provided in related disclosures and do not appear in the computation of net cash provided by operating activities.
@2012-04-23 05:46:17
I think that they have treated the interest expense as CFF and this is why it does not appear in CFO but is included in the cash change.

i dont know y they r not adding back the dep though.
@2012-04-23 08:48:46
interest payment is part of CFF.
U don`t include that in the calculation of CFO.
@2012-04-23 17:36:22
Hold on!
Interest expense it treated under CFO if not already accounted for in net income. Thats why the software is right. I am unsure what the change in cash is though
@2014-09-09 01:39:05
Hi. Am I super late? hehe.

First, pls. clarify if the " Sale of equipment for $10,000 gain $20,000" or is it " sale of equipment for 20,000 gain of 10,000?".

Cash flow from Operation
Net Income 50,000 + Bad Debts 2,000 - Inc in Inv 1,000 + Inc in A/P 2,000 - income from sale of asset 10,000 + Dep 5,000.00. = + 48,000 (inflow)

Cash flow from Investing
Outflow from purchase of new equipment (15,000) + inflow from sale of asset 20,000.00 = + 5000 (inflow)

Cash flow from Financing
Outflow from repurchase of common stock (10,000)+ outflow for issuance of dividends (4,000) = - 14,000 (outflow)

Total Cash flow = + 39,000 ( 48000+5000-14000)

CFA Discussion Topic: Cash flow problem

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