In short, Are we treating Contra Accounts (Assets) as Liabilities and vice versa in terms of cash flow statements Use and Source?
Also can anyone recommend any good techniques regarding CashFlow review for this section? It took me a few days to really wrap my head around the building of Direct/Indirect - Use/Source,etc. I am overthinking this section as after all it feels like very little information.
I wrote a couple of articles on CFO that may be of some use:
(Full disclosure: as of 4/25/16 there is a charge to read the articles on my website. You can get an idea of the quality of the articles by looking at the free samples here: http://www.financialexamhelp123.com/sample-articles/.)
I personally think of Contra Accounts as reductions in whatever they are contra-ing (contra assets reduce assets) which is what they are. But if it helps you to think of a contra asset as a liability then you should arrive at the same answer for CFA questions. It just probably isn’t a good habit.
If you spend some time reviewing the CF Statement from a few different sources (like Magician’s and others) it will probably come together for you.
More to the point, they have nothing to do with the cash flow statement.
Sure they do. Take AR. There is probably a provision for uncollectible accounts. When adjusting your net income to arrive at CFO, you need to consider the change in the contra.
Um . . . no you don’t.
If you book sales of $100,000 on account and increase Allowance for Doubtful Accounts by $4,000, you deduct $100,000 from CFO, not $96,000.
What you really need to do is look at how Allowance for Doubtful Accounts changes compared to Bad Debt Expense. But that’s beyond the scope of the CFA exams.
Not quite. You’d need to back out 96 to get to zero CFO. The net income from the $100 sale is $96. When you put the $4 Allowance on your BS the debit side of the transaction is the IS (bad debt expense).
Correct.
You’re subtracting $100 for the increase in A/R (increase in a working capital asset, balance sheet) and you’re adding $4 for the BDE (noncash expense, income statement). You’re not making any adjustment _ specifically _ for the contra asset account AFDA.
It’s no different than adding back depreciation expense; you add back a noncash expense from the income statement, not (_ specifically _) an increase in a contra asset account (in this case, accumulated depreciation).
I strongly believe that if the average Level I candidate starts thinking about contra accounts with respect to CFO, they’re going to be more confused than enlightened.