- CFA Exams
- CFA Level I Exam
- Study Session 7. Financial Reporting and Analysis (2)
- Reading 23. Understanding Cash Flow Statements
- Subject 2. Preparing the Cash Flow Statement
CFA Practice Question
There are 534 practice questions for this study session.
CFA Practice Question
A financial analyst has gathered the following information from the balance sheet and income statement of a company:
What is the cash flow from operations?
Explanation: CFO = 765 + 184 - 69 - 54 - 83 - 37 + 55 + 33 = 794. Gain or loss on sale of assets is CFI, not CFO.
User Contributed Comments 23
|danlan||Should include 33, so A is wrong.|
|joshnick||yes 761 is wrong because you must add the loss on sale|
|baple||Why is Notes Payable not Considered . Is notes Payable for a period great than a year and treated as Long term liability
|Shelton||CFO = 794
CFF = - 213 + 375 - 128 = 34
CFI = -395 + 50 = -345
|RichWang||Where does depreciation fit? Do we need to add it back to get CFO?|
|gaur||yes Depreciation should be added as it is a non-Cash expense. Also Iam assuming Notes payable was not included in CFO since Notes are greater than 1 year and thus would be classified in CF from financing|
|tanyak||So loss on sale is always CFO? So it's added?|
|o123||no tanyak...the loss on sale is NOT cfo, thats why its added 'back'.
Net Income includes this loss in its calculation...but Loss on sale of an asset is a CFI. so you need to add back the loss to adjust.
|ninagraham||the explanation says gain or loss on assets is CFI not CFO which I agree. Please explain why the $33 was included in this calculation if you are saying it is not part of CFO? Thanks|
|semra||ninagraham, indirect method should be used for calculation since net profit given (revenue & cogs missing) loss/gain of fixed assets is added in indirect method.|
|achu||I agree with o123, because NI includes the CFI from sale of asset, you must remove it.|
|achu||Rememeber, Notes Payable is NOT part of CFO but CFF.|
|ljamieson||NI +/- dec/inc Assets +/- inc/dec current Liabs|
|todolist||gain/losses on sale of investments/assets only adjusted for CFO cashflow under indirect methold|
|boddunah||loss on sale of fixed assets is non cash item .non cash items do not affect cash flow statements. bc of less conservative depreciation method was used that resulted in loss .loss was already accounted for in NI . so need to remove effect of non cash item. thats why $33 was added back to remove this non cash item effect.
If it was gain on sale fixed asset. It would be accounted for in NI. so need to deduct from NI to get OCF in indirect method.
|omya||increase in other current assets also reduced to find out cash flow from operations from Direct Method.|
|ColonelCFA||Am I wrong in my assumption when I did this problem that cashflows will always be greater than net income?|
|leftcoast||ColonelCFA - If all sales were done on credit (increase to accounts receivable) and all purchases were done in cash and accounts payable was paid down, it's very possible to have lower cash flow than net income.|
|Katiepuff||Please help anybody: we add back 33 loss on sales, because it's CFI not CFO. I get that. But then why don't we add back other cash flows such as the 395 outflow to equipment because that's CFI and not CFO either? Why do we ignore all CFI and CFF cash flows except for the 33 loss on sales which we compensate for?|
|schweitzdm||Katie it seems to have something to do with indirect vs direct method.
The 33 is added back because we must reverse changes to our given Net Income.
|schweitzdm||CFO with indirect method:
1) Start with net income
increases in assets: deduct
increases in liabilities: add
decreases in assets: add
decreases in liabilities: deduct
3) Add depreciation & amortization
4) Eliminate any gains/losses on disposal.
(Add back any losses, deduct any gains)
|rjdelong||Just of of curiosity how would Direct Method differ? Would the question give us Rev and COGS and then ask us for CFO? How would we calc CFO given those?|