FSA Questions from Schweser

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wangta01

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Hi guys,

Have a coupe questions for you that I got wrong in the Schweser FSA book:

#17 on Pg 102 (book 3)
Which of the following would NOT cause a change in CFI?
A. Sale of a division of the Company
B. Purchase of new machinery
C. Increase in depreciation expense.
D. Sale of obsolete equipment with no remaining book value.

Also, on page 123 (book 3), under the description for Cash Flow Coverae of Fixed Financial Costs, it says "In this form, the cash flow measure includes depreciation expense, deferred taxes, and the impact of changes in net working capital".

Now, I understand deferred taxes and net working capital, but how does CFO include depreciation expense? Using the direct or indirect method of calculating CFO, depreciation expense is either ignored or added back.

FYi, the cash flow coverage of fixed financial costs = CFO + interest expense + ELIE/Interest expense + ELIE
 
So what did you pick for the above question? There's obviously a trick here cuz saying an increase in depreciation expense would be too easy, right?
 
see, here's my confusion and maybe i'm thinking too much into this...if depreciation expense increases, that usually means the company purchases a new asset/PP&E - so would that change CFI.

Would a sale of division qualify as a change in CFI?
 
goldcoins Wrote:
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> depreciation is a non-cash expense. Hence C


That's what I'm saying though, C, but that seemed wayyy too easy.
 
CFAHouston,

Depreciation expense can increase if a firm uses accelerated methods. Moreover, change in depreciation will not cause CFI to increase since depreciation is merely an allocation of expenses over a period greater than 1 cycle.

Sale of division can qualify as CFI if the purchase is for investment purposes.
 
Goldcoins,

Correct, if firm decides to change its deprecation method, depreciation can increase. Depreciation is not directly related to CFI (its non cash), however, my logic (and as I mention it might be thinking too much into it) was that deprecation could increase because company purchased new assets (CFI).
 
i wd say C ...and i agree with houston .. however the question does not give any info about dep. mehods or new purchases .
what is the answer from the book ??
 
"however the question does not give any info about dep. mehods or new purchases ."

I pray every night that CFA would be more clear than Schweser or stella.
 
Hi guys, sorry for the late response.

Answer in the book is C, as depreciation is a non-cash expense. I didn't choose C, because i was on the line of thought that cfahouston described above.

What happens if in say, one year that a company decides to switch from straightline to double declining, etc.

Say, 2004, fixed assets = 1000, with depreciation of 100. In 2005, fixed assets = 1000, with depreciation of 200 (accum depreciation = 300).

2004:
Gross Fixed = 1000
Depreciation = 100
Net Fixed = 900

2005:
Fixed = 1000
Depreciation = 200, Accum = 300
Net Fixed = 700

In terms of CFI, this wouldn't change CFI at all? When looking at fixed assets for CFI, do i look at only GROSS and not Net fixed assets?

Also, can anybody shed light on my second question?

Thanks guys, you're comments are great!
 
Wang - CFI won't get effect because that only time we look at investment for CFI is when we purchase or sell it. So switching depreciation method would be irrelevant.
 
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