A company reported greater CFO than NI. Which of the following is most likely to have caused the difference? a) increase in dividends payable b) inventory purchases exceed COGS c) current option of long-term debt increased d) prepaid expenses increased by a smaller amount than the accrued wages increased during the year That’s another 2007 BSAS question btw. Is it me or do you guys find that these questions a bit more challenging than your average CFAI practice exam?
off topic, how will an increase/decrease in dividends payable be treated for CFO? i know dividends paid is CFF.
D?
A - related to CFF B - We need to know Acct payable. C - Current portion of long term debt is CFF
I’d go with D also as both are contra accounts and CFO’s grew more.
C? Since current portion of long term debt will reduce net income without affecting CFO.
i guess im goin wid smeet for my answer.
I remember this one…took me a while to get past it during the exam. BSAS FSA & Asset Val questions were substantially more difficult than schweser, let alone CFAI. I am not convinced with the difficulty levels of CFAI tests (except ver 3: ethics), with a pass rate of 35-36%…what gives…
D, for sure
a) increase in dividends payable This is a CFF item. Does not impact CFO or NI. b) inventory purchases exceed COGS If Inventory Purchases exceeds COGS --> would go to the EI Asset balance. No impact on CFO, or NI. c) current option of long-term debt increased This would again affect CFF. d) prepaid expenses increased by a smaller amount than the accrued wages increased during the year So by elimination D again. CP
i agree with D.
inventory purchases exceeding COGS wouldn’t affect NI, but would depress CFO edit: prepaid expenses increasing would depress CFO, but if wages payable increases by more than that amount, then the net effect would be higher CFO (hope that gives the right answer)
sv102307 Wrote: ------------------------------------------------------- > C? Since current portion of long term debt will > reduce net income without affecting CFO. I dont think current portion of long term debt will enter NI
. edit. misread p***ng question.
increasing current portion of long term debt will increase interest expense, lowering both NI and CFO
I agree with CPK. I think we can answer this question by stating the relationship between net income and CFO. CFO = Net Income + Non-Operating I/S Expenses + Noncash I/S Items + Current Liability Increases - Current Asset Increases A. An increase in dividends payable relates to CFF, not CFO. B. If inventory purchases exceed COGS, inventory has increased. Thus a current asset has increased. That’s a use of cash that would make CFO less than net income, the opposite of what we’re looking for. C. This means the company needs to pay back a portion of its long-term debt this year. This is a CFF item, not a CFO item. D. This is saying that assets increased by less than liabilities, so the net effect is that current liabilities increased. Wages are an operational item, so an increase in accrued wages would cause CFO to exceed net income. Imagine the company simply doesn’t pay its workers for a year. That’s a significant source of cash that would show up in CFO (and a higher cash balance next year), but wouldn’t increase net income. The asset of the higher cash balance next year would be balanced by the increased wages payable.
Dimes27 Wrote: ------------------------------------------------------- > increasing current portion of long term debt will > increase interest expense, lowering both NI and > CFO Wont tht affect Next yrs NI then?
smeet Wrote: ------------------------------------------------------- > Dimes27 Wrote: > -------------------------------------------------- > ----- > > increasing current portion of long term debt > will > > increase interest expense, lowering both NI and > > CFO > > > Wont tht affect Next yrs NI then? no, not if it increases in the current period… I’m actually thinking about it in terms of a new loan in the current period, as opposed to a redistribution of current/lt debt. Whether or not that’s a good assumption I’m not sure. Under that assumption, IE should increase, decreasing CFO,NI. Not under the assumption, IE should be unchanged not effecting either NI or CFO. It doesn’t effect CFF either to the best of my knowledge as moving a debt from lt to st, it is still a debt, thus under CFF. hope that makes sense
Even if u get a new loan in the current period, your cashflow and NI will be affected in the next quarter or yr when you record the expense. Your liability will change only on the BS
Are you saying if a company gets a cash inflow from a loan in 2005, it is only reflected in CFF in 2006? (assuming yearly periods)