- 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
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?
B. Add $8 million
C. Subtract $2.4 million
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 |