- CFA Exams
- CFA Level I Exam
- Study Session 9. Financial Reporting and Analysis (4)
- Reading 29. Financial Reporting Quality
- Subject 4. Detection of Financial Reporting Quality Issues
CFA Practice Question
There are 90 practice questions for this study session.
CFA Practice Question
An arrangement between Delphi and GE Capital allows Delphi to finance its accounts payable through GE Capital. In the period when GE Capital pays the amounts due from Delphi to its vendors, Delphi reclassifies these items from accounts payable to short-term loans. The reclassification results in a(n) ______ in Delphi's operating cash flow in that period. In the subsequent period Delphi repays GE Capital; the outflow of cash is reported as a(n) ______ activity.
A. increase; financing
B. decrease; operating
C. decrease; financing
Explanation: Operating cash flow is lower since accounts payable is reduced.
It is a financing activity because it is a repayment of a loan.
User Contributed Comments 13
|wink26||Wouldn't having a decreased Accts Payable increase Op CF? If you have less bills, CF goes up. So it should be B?|
|bmeisner||No, thats not correct wink because increasing accounts payable means the company is waiting longer to pay back its suppliers and thus increasing the amount of cash it holds for that reporting period relative to the last.|
|serboc||just think of indirect method..
decrease in liabilities is a negative
|clarelau||Hi,serboc, good point|
|RAustin||in other words, the cash that goes out from operating activities is lower as a result of not needing to pay for payables.|
|Mariana80||under ifrs can't you classify interests paid as operating cash flow?|
|TarriqP||I'm lost here.... The cash outflow for AccPay is no longer classified as operating? So that outflow is now Financing rather than operating? So operating CF has less outflow? Therefore it should be higher (less outflow).
Can someone please explain...
|alles||Yes, a decrease in liabilities (here accounts payable) is an outflow of operating activities. But here there was no cash (from Delphi) involved in the decrease of accounts payable. It was a non-cash transfer from accounts payable (debit) to short-term loans (credit) because it was GE that payed the vendors directly. So why would this decrease lower Delphi's operating cash flow? It actually increased it because the cash outflow that was supposed to happen to pay the vendors (as operating) went through as a financing cash outflow to pay the loan to GE.|
|CJPerugini||I agree with TarriqP and alles.|
|kamcooler||Also don't get it - surely accounts payable only reduces cash flow if you actually pay them during the period. As there is no offsetting cash inflow from GE but a new financial liability created to offset the reduced A/P liability, where is the A/P reduction "outflow" balanced out on the cash flow statement?|
|zxy_gg||Unless Delphi's main LOB is financing these short term loans can't be classified as operating CF, rather investing CF.|
|Albert123||I understand that lowering a liability is a use of cash. But since GE capital is the one financing it. Operating cash flow should be higher in comparison ( a situation where Delphi finances its acc. Payable) why is CFO lower then? I am confused .. please help|
|cfastudypl||Kindly refer to Serboc's comment above and do a little familiarization with the indirect method of preparing cash flow statement. Had the fund from GE not used to pay vendors, cash flow from operations could have increased. So the inflow from GE was used to pay vendors and therefore reduced Delphi's cash flow but created a loan liability, hence it will be treated under financing activity when the loan is repaid.|