CFA Practice Question

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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?

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.
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