CFA Practice Question

There are 90 practice questions for this study session.

CFA Practice Question

ABC issues 1 million shares from options exercises at $5 and receives $5 million. However, to avoid dilution of EPS, ABC repurchases all of these 1 million shares at the market price of $10. What amount will ABC report for this transaction under GAAP?
A. $5 million operating cash inflow
B. $5 million financing cash inflow
C. $5 million financing cash outflow
Explanation: Under GAAP the firm will report a $5 million net outflow of cash from financing activities (1 million x ($10 - $5)). However, since the options are a form of compensation, the cash outflow would be more appropriately categorized as operating cash flow.

User Contributed Comments 3

User Comment
HenryQ What on earth is the answer? Financing or operating?!
xiajessy as an analyst, we should treat both option proceeds and share repurchases as operating cash flow, however, the question is asking under GAAP, then normally, they are treated as financing cashflow, that is why answer C is correct
danbacarin Under US GAAP the only thing that goes under financing CF is the dividend paid. All the rest go to operating CF. Only IFRS allows for flexibility. So it should have no impact on financing CF. Right?
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