CFA Practice Question
Which of the following is (are) FALSE under GAAP?
II. The investing, financing and operating cash flows must together balance out to zero, to preserve the relationship cash in = cash out.
III. Dividends received from investments in the stocks of other firms are classified under investing cash flows.
IV. Interest paid on debt financing is classified as operating cash flow.
I. The change in cash balances in consecutive balance sheets equals the operating cash flow of the firm over that period.
II. The investing, financing and operating cash flows must together balance out to zero, to preserve the relationship cash in = cash out.
III. Dividends received from investments in the stocks of other firms are classified under investing cash flows.
IV. Interest paid on debt financing is classified as operating cash flow.
A. I, II and III
B. I, II and IV
C. I, II, III and IV
Explanation: The change in the cash balances of a firm can come about due to investing and financing cash flows, in addition to operating cash flows. Therefore, (I) is false. The relationship cash in = cash out is incorrect since the difference between the two flows goes into changing the cash balance of the firm. Hence, the operating, investing, and financing cash flows need not balance out.
2. Dividends paid on equity are considered financing cash flows.
3. Interest payments on debt are considered operating cash flows.
4. Interest received from debt investments is considered an operating cash flows.
It is very important to remember the following points about dividends and interest:
1. Dividends received from stock investments are considered operating cash flows.
2. Dividends paid on equity are considered financing cash flows.
3. Interest payments on debt are considered operating cash flows.
4. Interest received from debt investments is considered an operating cash flows.
User Contributed Comments 4
| User | Comment |
|---|---|
| Xocrevilo | CFO: divs received, interest payments, interest received CFF: divs paid, bond and stock issuance/sales CFI: asset investment/sale Key point is the difference in divs |
| jpducros | NOte that this is under US Gaap In IFRS, if cash in : Interests and Dividends are in CFO or CFI; if cash out : Interest and Dividends are CFO or CFF. |
| MylesGrenier | What's the point of even reading I and II if they are in every answer? Ha. |
| ashish100 | I think jpducros's strategy is misinform everyone so that he get ranked higher lol jk But interests and dividend have nothing to do with CFI. For IFRS: Dividends (In/Out) and Interest (Pmt/Recv) can all be either on the CFO or CFF. IFRS don't give a damn basically. |