FSA warm-up q of the morning

[bannisja]

Using the following information, what is the firm's cash flow from operations?

Net income $100
Decrease in accounts receivable 30
Depreciation 25
Increase in inventory 17
Increase in accounts payable 10
Decrease in wages payable 5
Increase in deferred taxes 17
Profit from the sale of fixed assets 5
Dividends paid out 35

A) 155.

B) 165.

C) 175.

D) 182.

 

[bishop]

Answer is B

 

[blouko23]

NI+A/R+Deprec.-Inv+AP-WP+Def. Tax-Gain

100+30+25-17+10-5+17-5=155

A

Dividends paid are a financing cash flow.

 

[bannisja]

Here's what Schweser had-

Net income
+100

Adjust for non-cash and non-operating items:


Depreciation
+25

Deferred taxes (increase)
+17

Profit from sale of equipment
-5

Adjust for changes in operating accounts:


Accounts Receivable (decrease)
+30

Inventory (increase)
-17

Accounts Payable (increase)
+10

Wages Payable (decrease)
-5

Cash Flow from Operations
+155

So that is 155, A is right.

Here's my question and I'd rather ask now then get wrong on exam- I put B and the difference is the profit from the sale of equipment. Why is that a subtraction from CFO and not an addition b/c it's a gain? I'm sure this is easy and I just forgot it... if someone could quickly walk me through that one little item, I'd agree with the 155 answer.

THANK YOU IN ADVANCE!

 

[Moomin]

Answer is A if deferred tax is DTL (not DTA).

 

[Moomin]

bannisja,

Gain on sale is included in Net Income.

It must be removed when you compute CFO under the indirect method which starts from Net Income.

Otherwise double-count with CFI results .

 

[bannisja]

you rock, thank you