CFA Practice Question

CFA Practice Question

The financial statements of Multiverse for 2011 showed the following:

a. Dividends paid: 60
b. Provision for bad debt: 15
c. Depreciation: 90
d. Interest paid: 35
e. Proceeds from new bonds issued: 225
f. Bonds retired: 400
g. Gain on bonds retired: 25
h. Shares repurchased: 195
i. Net Income: 350
j. Tax rate: 50%

What was Multiverse's financing cash flow in 2011?
A. -380
B. -405
C. -430
Explanation: Items a, e, f, g and h are financing items. However, remember that item g, gain on bonds retired, is NOT an extraordinary item and is presented before-tax. Hence, the total cash spent on retiring bonds = 400 - 25 = 375. Therefore, financing cash flow = -60 + 225 - 400 + 25 - 195 = -405.

User Contributed Comments 15

User Comment
pigcat Cash in and out related to share issuance should fall into financing section. Furthermore, gain on retire of bond is non-cash item. If there is any calculation related to it, it should be substracted from operating cash flow under indirect method, or ignored under direct method.
blumonster can't get the part on total cash spent on retiring bonds? can someone help?
masha the above assumes that you have a cash outflow of 400 for bond repurchase and you have a cash inflow of 25.
Bira looks to me 400 was book value, not market.
shasha reviewed the Q several times, still believe C is the correct answer. gain of bond retirement is not relevant to CFF for this case. we knew directly the cash outflow amount of 400, the bond's market value when it was retired, not its book value, so 400 was real cash movement, why we need to consider a non-cash gain? we don't!
humphrey if the numbers are all book value then 'shares repurchased' can't be directly plugged in the calculation either...
shasha noticed Bira's point, taking it as right. better we say: $400 bond was retired. for shares repurchased, it's a cash movement. now it's clear why the answer is B.
snider It actually does not matter if the gain is considered extraordinary or not. The question here is: the gain is not a cash flow from operations. It's a gain from financing. That's why it's included in CFF.
mtcfa I thought all gains and losses are adjusted to cash flow from operations.
anricus In hindsight, the answer makes it clear that the 400 is the book value and the 375 is the cashflow. However this was not so clear in the question!
pmandgi good one..
nsmwaura They say hindsight is 2020. In retrospect, I agree, $400 represents the book value not the cash flow amount.
todolist i thought shares repurchased is CFF too, which makes C the right answer...
Procbaby1 The "gain on bonds retired" is a CFF. This gain is removed when calculating CFO using the direct method to avoid double-counting! is a CFF
bencook Under IFRS "Interest Paid" could be classified as operating OR financing, but under USGAAP it is operating. Question text should specify USGAAP.
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