Cash is not a Current Asset - still included in acquisition question

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fullofquestions

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By now I was comfortable with the fact that Current Assets does not include cash.
I was working on a schweser question where company A purchases some portion of company B. The question goes on to ask
“The balance of A’s current assets as of December 1 2008, using the acquisition method is closest to:”
It is given that
-company A had current assets of 100 prior to the acquisition
-company B had current assets of 30 prior to the acquisition
-company A paid 20 for the portion of company B
So, if the question were about Assets and not current Assets then I would immediately think (100+30-20). Since they mentioned current Assets I was like, aha, they are being tricky and in this case cash is not a current asset so I will not count it. The answer in that case would be 130.
Turns out the answer is 110. If you think you know the rationale here, would you please explain? Thanks a ton.
 
I don’t see what’s wrong with the answer. Current Assets = Cash and Equivalents + Accounts Receivable + Inventories.
You paid cash 20 for the company, this is your cash outflow. Thus, you get: prior current assets + additional current assets - cash paid.
You ignore cash in calculations of Net Operating Assets, FFCF, and other stuff when you need to actually calculate the net change in our cash position ex-ante sharehold’s contributions and borrowing.
 
You are 100% correct. The CFA II 2010 mock exam question 55 exhibits what you are describing. In that FCFF calculation, when they compute the WCInv, they ignore i.e. remove cash from Current Assets.
I read your last paragraph and unfortunately I’m still not clear. Never mind the ‘other stuff’ portion, I’m not clear about the crux of the matter. As I understand it:
1. include cash in current assets always except for:
1a. Net Operating Assets calculations
1b. WCInv calculation (this applies to FCFF and FCFE calcs)
Can you expand on, ‘you ignore cash in calculations when you need to actually calculate the net cahnge in cash position ex-ante [before] shareholder’s contributions and borrowing.’? That is the part that is causing me problems. Much, much appreciated.
 
Include cash in current assets all the time, that’s the definition of current asets. Change in working capital is something else.
 
For calculating FCFF , WCInv is change is non cash current assets less change in non debt current liabilities.
“Non cash current assets” here implies that cash is a current asset, yet we dont condiser it for WCInvestment!
 
I have a follow up question to the OP … maybe I’m overthinking this
From above, company B had current assets of 30 PRIOR to the acquisition, then AFTER the acquision, how does B treat the cash inflow 20?
If B puts 20 in Cash & Cash Equivalent … then AFTER the acquision, under the acquisition method, should the aswer be 130?
 
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