- CFA Exams
- CFA Level I Exam
- Topic 4. Financial Statement Analysis
- Learning Module 4. Analyzing Statements of Cash Flows I
- Subject 4. The Indirect Method
CFA Practice Question
The following information is available for Woods Corporation: Accounts receivable, December 31, 2015, $22,800; Accounts receivable, December 31, 2016, $23,200. All of Wood's $300,000 in sales is on credit. How should the company treat this information in the operating section of its 2016 statement of cash flows prepared under the indirect approach?
B. Decrease accrual-based net income by $400
C. Increase accrual-based net income by $23,200
A. Increase accrual-based net income by $400
B. Decrease accrual-based net income by $400
C. Increase accrual-based net income by $23,200
Correct Answer: B
When the accounts receivable total increases, the amount of cash collections is less than the amount of accrual revenues. The $400 difference is subtracted from accrual-based net income to arrive at net cash flows from operating activities.
User Contributed Comments 11
| User | Comment |
|---|---|
| bentang | why subtract and not add $400? |
| bobert | For indirect, increase in asset = decrease in CF and for an increase in liabilities = increase in CF |
| MMattioli | inverse relationship for an asset which A/R is |
| surjoy | If I am not wrong, I deduce, the net transaction is an expense of $400 in Income statement. Right? |
| wankoo | Bentang: When A/R increase by 400: Income statement: Asset goes up by 400 Cash Flow: Cash Outflow since the company not getting the money from customer has increased by 400. Surjoy: Income statement: Asset(A/R) increased by 400; thus not an expense in the income statement. |
| bundy | Increase in Acct rec means we didn't collect the cash even though we recorded it in NI so therefore it is subtracted from CF |
| magus | A/R going up as seen in this situation is NOT a source of cash. If it doesn't translate into cash coming in, you subract. |
| Ifi2703 | Simple way to view this - you have an additional $400 now as an asset (the accounts receivable) and its been included in your income figure. But, in actuality, this is cash that you have not yet received, so to prepare the cash flow statement correctly this $400 needs to be deducted from the net income amount. |
| robbiecow | CFO (indirect) = NI + NCC - changes WC |
| praj24 | Ifi2703 - That sorted me out! cheers |
| choas69 | NOTE: increase in Receivables is deducted in both Direct and inDirect method. |