Dividends Paid: CFO or CFF?

[nnavigator]

Does anyone know why Dividends Paid of $25 is counted as CFO, even though it’s stated within the question that it’s considered a financing activity? The question does not state that the company is using GAAP or IFRS. Thank you! This is from the CFAI EOC.
Year 2009, 2010
Retained Earnings: 120, 145
A/R: 38, 43
Inventory: 45, 48
A/P: 36, 29
In 2010, the company declared and paid cash dividends of $10 million and recorded depreciation expense in the amount of $25 million. The company considers dividends paid a financing activity. The company’s 2010 cash flow from operations (in $ millions) was closest to:
A) 25
B) 45
C) 75
Answer: B is correct. All dollar amounts are in millions. Net income (NI) for 2010 is $35. This amount is the increase in retained earnings, $25, plus the dividends paid, $10. Depreciation of $25 is added back to net income, and the increases in accounts receivable, $5, and in inventory, $3, are subtracted from net income because they are uses of cash. The decrease in accounts payable is also a use of cash and, therefore, a subtraction from net income. Thus, cash flow from operations is $25 + $10 + $25 – $5 – $3 – $7 = $45.

 

[moxnguyen]

Retained earning of 2010 = 145 - 120 = 25
Net income of 2010 = retained earning + cash dividend paid = 25 + 10 = 35
Change from A/R = 5
Change from A/P = -7
Change from inventory = 3
Using indirect method we have:
CFO= NI + depreciation - change from A/r - change from inventory + change from A/P = 35 + 25 - 5 -3 - 7 = 45
Dividend paid is not counted as CFO, it is only used to calculate net income and from this figure we can calculate the CFO by using indirect method.
In addition, dividend paid in this case is CFF outflow under US GAAP. To calculate CFO in this question, we have to use indirect method, which only allowed under US GAAP.

 

[nnavigator]

Awesome, thank you very much!!!!