Earlier this year, Barracuda Company issued 5,000 employee stock options. Recently, 2,000 options were exercised at a price of $10 per share. To avoid dilution, Barracuda purchased 2,000 shares at an average price of $12 per share. Barracuda reported both transactions as financing activities in its cash flow statement. For analytical purposes, what adjustment is necessary to better reflect the substance of the stock repurchase?
Operating cash flow Financing cash flow A) Decrease $4,000 No adjustment B) Decrease $4,000 Increase $4,000 C) No adjustment Increase $4,000 Correct answer is B. How to get that answer
Both transactions were reported as financing activities. There is a net difference of $4,000 on the exercise. If you consider the employee option exercise to be better classified as compensation/ wages, that needs to be adjusted in the CFO number. This is the difference in exercise price and average. ($12 - $10) x 2,000 = $4,000. Therefore, increase CFF by that amount and reduce CFO to offset.
Could be off, but that is how I interpret the question…
I would attempt this by elimination - eliminate A and C because you cannot adjust one cash flow and leave an unaccounted for figure of 4k. Hence it has to be one where OCF/FCF adjustments balance each other out.
