CFA Practice Question

There are 534 practice questions for this study session.

CFA Practice Question

A European-based company follows IFRS and capitalizes new product development costs. During 2015 they spent €25 million on new product development and reported an amortization expense related to a prior year's new product development of €10 million. Other information related to 2015 is as follows (€ millions):

Net income: 225
Cash flow from operations: 290

An analyst would like to compare the European company to a similar U.S.-based company and has decided to adjust their financial statements to U.S. GAAP. Under U.S. GAAP, and ignoring tax effects, the cash flow from operations (€ millions) for the company would be closest to:
A. 265
B. 275
C. 285
Explanation: If all development costs had been expensed then net income would be reduced by the amount spent and increased by the amortization of the previously capitalized amounts: 225 - 25 + 10 = 210 million. CFO would be lower by the amount spent on development 290 - 25 = 265 million. Note: The amortization of previous development costs is a non-cash expense so does not affect cash flow.

User Contributed Comments 1

User Comment
DENNY1 amortization would have added back to net income to arrive at CFO for IFRS company. So that should have to adjusted somewhere
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