It seems I don’t understand quite well the accounting shenanigans section. Do you know for Sale of a long-term receivable, Sale of held-for-trading securities, and Securitization of accounts receivable, which would most likely increase the cash flow from investing activities under the indirect method? The correct answer is A (sale of long term receivables) and it says the other 2 choices are operating activities.
I don’t understand. Could someone explain to me the answer, and possible each one of the 3 activities?
And does direct or indirect method really matter in understanding accounting shenanigans on the cash flow statement?
I had the same issue when I came across this problem in the Mock and could not find a definite answer
My conclusion was the long-term nature of the receivable reclassifies it as an investment activity by means of a loan to a customer, even though the original service may not of been a loan.
On the contrary, the other 2 choices are short term since AR is a current asset and a held-for-trading security is also a current asset as both are expected to be converted to cash in the short term
Held for trading securities are considered short term activities (also with regards to G/L classification - affecting current income).
Securitization is also a short term activity used to create liquidity.
Both are short term operating activities.
The sale of a long term A/R is a +ve cash flow (you get money in exchange of the note) and since it’s LT - investment activity. (it’s not operating, it’s not financing, has to be investment).
Edit: I’m not sure what your last question really means. Haven’t looked at the CFA L1 materials yet but for the CPA the direct/indirect method were must-knows and in-depth.
Cash flows from held-for-trading securities is CFO (SchweserNotes, p. 110), and cash flow from selling accounts receivable is CFO (SchweserNotes, p. 304).
By the way, the method of computing CFO – direct or indirect – is irrelevant; they give the same CFO, and have no effect on CFF and CFI.