Book 6 Exam 3 AM Q. #47

I understand all of your argument. But it seems to contradict with what I read in CFAI book. Please read the page I refer to. Then we can continue to discuss. I think I am done with this untill some of you read it.

Saturdaynitefeva Wrote:
-------------------------------------------------------
> Don't get confused disptra, working capital
> accounts ARE included under both methods. What the
> posts above are just trying to say is that here it
> already is included with cash expenses.
 
disptra -

I'm not basing this on Schweser - I'm basing it on the fact that I'm a CPA, CFA Charterholder, undergrad and masters in accounting with 12 years of teaching experience.

You need to realy know cash flow, not from a memorize the rules approach, but from fundamentally understanding how diferent items affect it.

yes, i can foresee a situation where you might look at the changes in some working capital accounts to back into the direct method, but you need a lot more info than they have in this problem. The absence of CGS info and changes in accounts payable mean that you cannot do the direct method here. You can spend $5,000 on inventory puchases, and inventory might go up, down or stay the same, depending on FIFO vs LIFO, etc.

You need to be able to recognize what they are asking, and understand how to answer that, and you can';t do that by memorizing a template from the book, becuase I can guarantee you that they will throw curves at you during the exam. They will present information and ask questions in a format different than what you are used to seeing (as in this problem) The test is designed to make sure that people master CONCEPTS, not procedures, becuase in real life info doesn't come in a nice neat package.



Edited 1 time(s). Last edit at Tuesday, May 29, 2007 at 07:21PM by Super I.
 
Don't have that book but yes you're right, Schweser Book3 actually puts it under cash inputs as well....I think in the real world you might just be looking at what goes in an what goes out in cash like when you look at your bank account...inventory goes up so I paid for it, so it is a cash expense no matter which category you put it in
 
I don't have Schweser on that, but I'm looking at the old White Sondhi text which has the "hybrid" version of the direct method. It starts with accrual (ie non-cash) numbers like sales and COGS and then modifies them based on changes in balance sheet accounts.

That's one way to back into the direct method. the other way is just to say "hey, how much cash did I take in and how much did I spend?". In this problem at the top they don't give you COGS, they don't give you changes in payables - they don't start with accrual based income statement numbers. They start with cash taken in and cash expended, which is why no adjustments are needed.
 
Yes. You are right. CFA example has CGS and account payable number. So if I do not have these 2 number, I have to ignore inventory changes. That is very interesting. Now we are getting somewhere.

Super I Wrote:
-------------------------------------------------------
> disptra -
>
> I'm not basing this on Schweser - I'm basing it on
> the fact that I'm a CPA, CFA Charterholder,
> undergrad and masters in accounting with 12 years
> of teaching experience.
>
> You need to realy know cash flow, not from a
> memorize the rules approach, but from
> fundamentally understanding how diferent items
> affect it.
>
> yes, i can foresee a situation where you might
> look at the changes in some working capital
> accounts to back into the direct method, but you
> need a lot more info than they have in this
> problem. The absence of CGS info and changes in
> accounts payable mean that you cannot do the
> direct method here. You can spend $5,000 on
> inventory puchases, and inventory might go up,
> down or stay the same, depending on FIFO vs LIFO,
> etc.
>
> You need to be able to recognize what they are
> asking, and understand how to answer that, and you
> can';t do that by memorizing a template from the
> book, becuase I can guarantee you that they will
> throw curves at you during the exam. They will
> present information and ask questions in a format
> different than what you are used to seeing (as in
> this problem) The test is designed to make sure
> that people master CONCEPTS, not procedures,
> becuase in real life info doesn't come in a nice
> neat package.
 
In real world, you would always has COGS and account payable number? Can you give me a comany which do not report these 2 number? There is nothing real about this question.
 
Hi all
if we are considering inderect method why we are not begin with net income (mean not deduct taxes from pretax income)?

thx
 
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