CFA Practice Question

CFA Practice Question

The following information should be used according to the provisions of SFAS 95 (Statement of Cash flows) and using the following data.

Net Income: $50,000
Provision for bad debts: $2,000
Increase in Inventory: $1,000
Increase in accounts payable: $2,000
Purchase of new equipment: $15,000
Sale of equipment for $10,000 gain: $20,000
Depreciation expense: $5,000
Repurchase of common stock: $10,000
Payment of dividend: $4,000
Interest payment: $3,000

What is the change in cash?
A. $39,000
B. $46,000
C. $45,000
Explanation: CFO: 50k + 2k - 1k +2k - 20k + 5k = 38k
CFI: -15k + (20k+10k) = 15k
CFF: -10k + (-4k) = -14k
total cash flow = 38k + 15k -14k = 39k

User Contributed Comments 23

User Comment
Franz Where is the interest payment included? Shouldn't it be part of cash flow from operations?
bublelulu The depreciation exp. of $5000 should be added back to the net income, since it is an non-cash exp.
hl88 Depreciation should be added back to CFO as the explanation indicates, but it should be deducted from CFI, therefore, its net effect is 0. Be careful for that $20,000 is the sale price of the equipment being sold, and $10,000 is the gain. But anybody give more details on provision of bad debts? Bad debts expense would be a deduct item from net income.
derekt Depreciation decreases net income by 5,000 therefore it should be added back. Depreciation does not affect CFI OR CFO at all since it is non-cash. Also, bad-debt expense is a non-cash expense, as it means that cash was not recieved, NOT that there was a cash outflow. Since it is a non-cash expense, it should be added back onto net income. The right answer is B. Anyone else agree?
elda CFO: 50000+2000-1000+2000-10000(gain from F.A. sale)+5000 = 48K (interest payment is already deducded to get N.I.)
CFI: -15000+20000 = 5K
CFF: -10000-4000 = -14K
jonaszam What about interest payments?
jonaszam Direct method subtracts interest expense from CFO.
dimos Can anyone help me? There are cases where gain from the sale of fixed assets is included in CFI and other cases it is not!!!!! Which is the correct procedure?
danlan I think gain from the sale of fixed assets is included in CFI, right?
wollogo Gains on sale are never included in CFI because this is non-cash, you would only use it to work out the cash value recieved for the asset. In this case the book value is 10K and the gain on sale is 20K meaning that you receive 30K for the asset (note that this question is poorly worded because it implies that the asset was sold for 10k which is untrue because then book value would have to be -10K for the gain on sale of 20K).

The gain on sale is subtracted from NI in CFO because it is non cash. A is the correct answer.
jayjunk I think Elda is right.

The wording suggests the asset sold for 20K, (10K above it's book value).

What the asset sold for is immaterial, for the gain is already included in NI. It will be subtracted once from CFO and added once to CFI, hence cancel out.

So what matters is the book value, which will be added once to CFI. The way the explanation (by is presented suggests the gain is $20,000 and the book value is $10,000 (consistent with wollogo's explanation).
jckasn the explanation regarding the gain is pretty clear. Sale of equipment for a $10,000 gain:$20,000. It clearly indicates that there was a gain of $10,000 on selling the asset for $20,000. So Book value was $10,000.
lazzor no body answered is Interest Payment is CFO or not and why ?
Marg I don't get it - where does the interest payment show up?
dimanyc i think the authors forgot about the interest pmt, which should be an outflow in CFO.
SSPatel The interest payment is already included in net income
steved333 of course!! NI= EBIT - I - T
StanleyMo if they give us EBIT, we would need to subtract tax payment and interest payment as we need cash to pay them, but they already give us the NI, this save our time to calculate them :)
iambroke wollogo....I think you are wrong....Gains on sale of asset is a CFI....therefore it must be removed when arriving at CFO
Rinoa86 net income includes interest payments already!
thammy Excellent question to clarify CFO, CFF and CFI. Wollogo, thank you so much for clarifying how much was obtained from the sale of asset. I was confused at the answer but your explanation absolutely makes sense!

Elda's explanation is right by luck because questions clearly says gain is 20000.
andrewmorgan The gain on sale of asset needs to be takeon off net inc not the 20k cash so CFO is net 10k higher. CFI is just the cash transaction of selling and buying so 20 - 15 = 5k. The net result is the same though...
birdperson im with elda... good work
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