- CFA Exams
- CFA Level I Exam
- Topic 4. Financial Statement Analysis
- Learning Module 4. Analyzing Statements of Cash Flows I
- Subject 4. The Indirect Method
CFA Practice Question
Taloga Company has the following information for its accounts payable: Balance at December 31, 2015, $40,000; Balance at December 31, 2016, $25,000. How should Taloga treat this information when preparing its statement of cash flows under the indirect approach for the year ending December 31, 2016?
B. Add $15,000 to cash flow from operations
C. Subtract $15,000 from cash flow from operations
A. Add $15,000 to cash flow from financing activities
B. Add $15,000 to cash flow from operations
C. Subtract $15,000 from cash flow from operations
Correct Answer: C
Taloga paid cash to decrease the accounts payable balance by $15,000. This is a use of cash, and Taloga subtracts $15,000 from operating cash flow.
User Contributed Comments 6
| User | Comment |
|---|---|
| ravdo | This is a classic! Love this question. |
| DonAnd | using the direct method would you have added it? |
| jingie | No, direct and indirect methods should arrive at the same cash flows. You subtract 15k because it was used up to reduce AP. |
| gill15 | Thinkin DonAnd is referring to cash paid to suppliers with the direct method....then you would add it. |
| magus | You have to subract it every time irrespective of method.....paying down a payable is a use of funds.... |
| majesty | In Direct Method you start from the top and go to the bottom, while in Indirect Method you start from the bottom and go to the top. Simplifying Income Statement: Revenue - COGS = Net Income => Revenue = Net Income + COGS. When increasing COGS (used in Direct Method adjustments), you decrease Net Income (used in Indirect Method adjustments) for Revenue to stay in balance. |