- CFA Exams
- CFA Level I Exam
- Study Session 7. Financial Reporting and Analysis (2)
- Reading 23. Understanding Cash Flow Statements
- Subject 1. Classification of Cash Flows and Non-Cash Activities
CFA Practice Question
The following information is from a company's 2015 financial statements ($ millions):
Retained earnings: 140 | 120
Accounts receivable: 43 | 38
Inventory: 48 | 45
Accounts payable: 29 | 36
Balances as of the year ending 31 December | 2015 | 2014
Retained earnings: 140 | 120
Accounts receivable: 43 | 38
Inventory: 48 | 45
Accounts payable: 29 | 36
In 2015 the company declared and paid cash dividends of $5 million and recorded depreciation expenses in the amount of $25 million. The company's 2015 cash flow from operations ($ millions) is closest to______.
A. 25
B. 30
C. 35
Explanation: The change in retained earnings is $20 and dividends are paid from retained earnings. 2015 net income equals the change in retained earnings plus any dividends paid during 2015.
Depreciation expense is added to net income and the changes in balance sheet accounts are also considered to determine cash flow from operations.
20 + 5 (dividends) + 25 (depreciation) - 5 (increase in receivables) - 3 (increase in inventory) - 7 (decrease in payables) = $35 million.
User Contributed Comments 3
| User | Comment |
|---|---|
| Inaganti6 | EXCELLENT QUESTION. So so so tricky. What a testicle twister of a question. |
| Mhmdjamal | Dividends must be deducted from net income(25) so why the correct answer is not 30? |
| bosher | No Mhmdjamal. Dividends are included in net income. It is not included in retained earnings. |