R34 - Cash Flow - Elan Practice Question 10 and 11

CFA Level I FRA
#1

In Q10 it says calculate CFO and doesnt specify either IFRS or USGAAP.

Net Income = 1000

Decrease Interest Payable = 85

Gain on Equipment Sale = 45

Increase Accounts Payable = 90

Decrease Inventory = 35

Increase Prepaid Assets = 105

Depreciation = 85

Increase Taxes Payable = 125

My answer was CFO = 1000-85+90+35-105+85+125 = 1145

When I looked at the answer key it deducts a gain on sale of equipment in calculating the CFO . Isn’t gain on sale of equipment related to CFI and should be excluded from the CFO calculation?

In Q11, it asks for a CFI calculation according to US GAAP similar kind of situation

Proceeds from sale of equipment = 32

Loss on sale of equipment = 9

Purchase of office premises = 100

My answer was CFI = 32 - 9 - 100 = -77

Elan’s answer was CFI = 32-100 = -68

Can someone explain why the gain is subtracted in CFO calculation in Q10 and loss on sale not included in Q11?

Thanks

#2

You are correct that this is a CFI activity. Since the entire proceeds from the sale of equipment must be recorded in CFI, if you do not adjust CFO for the gain or loss then you will be double counting NI already includes the gain/loss). Because of this, you add back losses and deduct gains in the CFO section.

#3

Thanks alot C3Po