CFA Practice Question

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CFA Practice Question

Hertz Corporation reports Revenue Earning Equipment (REEQ) in an unclassified balance sheet after Inventories and Prepaid Expenses and before Property and Equipment. For 2011, REEQ turns over approximately twice a year and represents 58% of total assets, whereas car rentals are 75% of total revenue. The rapid turnover makes REEQ acquisitions and sales appear to be operating activities, almost like inventory. But car rental revenues are Hertz's revenue source; hence, REEQ acquisitions and sales also appear to be investing activities. The fact that car rental revenues are Hertz's principal revenue source supports classifying REEQ acquisitions and sales as investing activities rather than operating activities. Hertz reports a $231.64 million net cash outlay on REEQ in 2011 ($4.016 billion for acquisitions less $3.784 billion from disposals) as operating activities. The classification has a material effect on reported operating and investing cash flow subtotals. Reclassifying Hertz's $231.64 million REEQ net cash outflow as investing activities will ______ net operating cash inflow by 81% and ______ net investing cash flow by 320%.

A. increase; decrease
B. increase; increase
C. decrease; decrease
Correct Answer: A

Note that REEQ net cash flow is negative.

User Contributed Comments 5

User Comment
alki Just read the last sentence, you can still answer the Q.
cong No brainer.
moneyguy Good Point, alki. I've been reading the last part of the questions to gauge what the question is asking for. Then I can eliminate all superfluous information as I read it from the beginning. Saves time and eliminates excess info in the brain that is not needed.
Seancfa1 Yep.
jrojasut09 @ moneyguy I definitely agree - save time - read what the question is asking for first
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