Questions on CF and financial analysis regarding Schweser Notes

[eddiecp]

I am studying the Schweser Notes and find some questions that really tricky,

1. Page 104, under USGAAP, transaction of trading securities is classified as CFO. Page 111, using indirect method, step 2 says “subtract gains or losses that result from financing or investing cash flow”. So, why Page 130 under Concept Checker, #23, the gain from trading securities ( which is an operating activity gain ) should be subtracted from NI?

2. The Notes say accounts on common size cash flow are expressed as % of total revenue , the formula sheet says they are expressed as % of net revenue , who’s correct?

3. Fixed assets turnover= _revenue/_average net fixed assets. We can assume the revenue of a company is going to be constant over the life of fixed assets (but normally, revenue goes higher every year). Therefore, since net fixed assets decrease every year, the ratio will increase significantly every year. How can the ratio work on measurement? This is not making any sense.

[Kunal_jani]

1. If you see page 111 step-2 “properly” it says, " subtracting gains or adding losses" and that is what is been done in no. 23 in concept checkers.

2. Revenue does not necessarily increase every year, the revenue generated is obviously dependent on the fixed asset( assuming it is PP&E)'s performance. And technically speaking a plant’s performance goes down as the time passes by and so does it efficiency to produce thus decreasing revenue.

[busprof]

@eddiecp

I am studying the Schweser Notes and find some questions that really tricky,

1. Page 104, under USGAAP, transaction of trading securities is classified as CFO. Page 111, using indirect method, step 2 says “subtract gains or losses that result from financing or investing cash flow”. So, why Page 130 under Concept Checker, #23, the gain from trading securities ( which is an operating activity gain ) should be subtracted from NI?

Gains/lossses are reversed because they represent ACCOUNTING increases/decreases that are reflected in NI (but aren’t cash based). So gains are subtracted and losses are added.

@eddiecp

2. The Notes say accounts on common size cash flow are expressed as % of total revenue , the formula sheet says they are expressed as % of net revenue , who’s correct?

Net Revenue.

@eddiecp

3. Fixed assets turnover= _revenue/_average net fixed assets. We can assume the revenue of a company is going to be constant over the life of fixed assets (but normally, revenue goes higher every year). Therefore, since net fixed assets decrease every year, the ratio will increase significantly every year. How can the ratio work on measurement? This is not making any sense.

Neither Numerator nor denominator has a predictable pattern. Revenue varies from year to year, and (while depreciation reduces book value of EXISTING net assets), first invest in new FA.

[S2000magician]

@busprof

@eddiecp

I am studying the Schweser Notes and find some questions that really tricky,

1. Page 104, under USGAAP, transaction of trading securities is classified as CFO. Page 111, using indirect method, step 2 says “subtract gains or losses that result from financing or investing cash flow”. So, why Page 130 under Concept Checker, #23, the gain from trading securities ( which is an operating activity gain ) should be subtracted from NI?

Gains/lossses are reversed because they represent ACCOUNTING increases/decreases that are reflected in NI (but aren’t cash based). So gains are subtracted and losses are added.

With all due respect, this _ isn’t _ the reason that gains and losses are, respectively, subtracted from or added to net income to arrive at CFO.

The reason is that these are not operating activities; they fall under the rubric of CFI.

Frequently (maybe even usually), these quantities do involve cash flows; e.g., when you sell an old, worn out machine. That cash flow, however, is CFI, not CFO, so you have to remove the effect in calculating CFO.

[eddiecp]

Thanks for your answer! One more thing to confirm is that does"ACCOUNTING increases/decreases" mean, in this question #23, even if we actually didn’t trade the marketable security, we only realize a change in value (so no cash flow), we need to record the gain in income statement. Therefore, since it is a purely recording instead of trading, we should deduct it from NI. On the other hand, if the this question states as “gain from traded marketable security”, we should do nothing upon it. Am I correct?

[eddiecp]

Marketable securities are falling under CFO. That’s why I ask this question, not the understanding of CFI and CFF. I think the guy you quoted is right.