CFA Practice Question

There are 534 practice questions for this study session.

CFA Practice Question

Lakeview Company owns 30% of River Company and accounts for this investment using the equity method. Lakeview's net income for the year is $20 million and River's net income for the same period is $8 million. River paid no dividends during the year. If Lakeview uses the indirect method for its cash flow statement, what amount will it add to or subtract from its accrual-based net income in its statement of cash flows related to this investment?

A. Add $2.4 million
B. Add $8 million
C. Subtract $2.4 million
Correct Answer: C

Lakeview's portion of River's net income is 30% of $8 million, or $2.4 million. This amount is not a cash flow, so it is subtracted from Lakeview's accrual-based net income to arrive at cash flows from operations.

User Contributed Comments 9

User Comment
surob so as it is a gain from investment, it should be accounted for in CFI. Right?
raphdamico because no dividends have been paid, the $8m net income of the subsidiary doesn't actually make it directly to the parent as cash.
ridone Since dividends are not paid they will not appear in the income statement in the first place?
surjoy If dividends are received by Lakeview, then it will be an inflow of CFO.
YOUCANDOIT great question!
Ifi2703 Lakeview has a claim to that amount of net income but has not received any portion of that profit in cash (dividends) so it shouldn't be included in their cash flow calculations.
johntan1979 NOTE: Add/subtract to or from NET INCOME, not cash flow
ascruggs92 Equity method - if company owns a significant portion of another entity, it recognizes net income from the entity proportionate to their ownership regardless of whether cash is received or not. In this case, $8M x 30% = $2.4M is recognized as net income. Dividends reduce the amount held in the investment account
choas69 InDirecet Method (simplified) :

add non-cash charges (depreciation)
deduct non-cash income (revaluation)

add non-cfo activities charges (interest paid)
deduct non-cfo activites income (dividend received)

W.C adjustments:

add: decrease in CA
less: increase in CA
add: increase in CL
less: decreases in CL

Net Cash
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