CFA Practice Question

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CFA Practice Question

Which of the following statements is (are) true with respect to the adjustments that an analyst should make to a company's statement of changes in cash flow before interpreting them?

I. Any reported interest income should be reclassified as a financing cash flow.
II. Cash flows from nonrecurring items should not be included in any of the main cash flow components.
III. If interest is capitalized, the amount should be included as part of the investing segment.
IV. Investing cash flows should be further classified into discretionary and non-discretionary items.
A. I and II
B. III and IV
C. II and IV
Explanation: I is incorrect because any reported interest income should be reclassified as an investing item, if it already isn't being so.

II is true because the whole point of analysis is to develop a financial picture that is more reflective of current, yet ongoing, reality. Hence, cash flows from nonrecurring items should not be included in any of the main cash flow components.

III is incorrect because regardless of how the interest expense is treated, the amount should be included as part of the operating activities.

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