How will cash flow from operations be affected by increases in inventory and long-term debt? Inventory, Long-Term Debt a. Decrease, Increase b. Decrease, No Effect c. Decrease, Decrease d. Increase, Decrease
C Inventory - Increase in inventory due to purchases—> CFO will decrease Long-term debt - Increase in CFF; interest payments will decrease CFO
That’s exactly what I thought. Stalla says B. I swear they are wrong…unless similar debt is issued at 0% YTM.
You’re taking it a step too far. Just answer the question that’s asked. LTD increases CFF, and has no effect in CFO. They didn’t ask about the effect of payment of interest on LTD. They are asking about two specific transactions; purchase of inventory and issuance of LTD and that’s all.
I hope not to see such questions (with such answers) in exam. 
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I see your point, but I disagree. CFO appears on the Stmt of cash flows which not issued for a point in time like the balance sheet, it is a report of a period of time, therefore the issuance of LTD and its effects on CF over that period (interest) will affect undoubtably affect both CFO and CFF on the statement of cash flows.
whodey Wrote: ------------------------------------------------------- > That’s exactly what I thought. Stalla says B. I > swear they are wrong…unless similar debt is > issued at 0% YTM. I take this back I guess zero-coupon bonds would not affect the CFO, not matter what interest rates are.
This is as about simple a question as you can get. You don’t say that the purchase of inventory leads to increased CFO because in the future you’ll sell it at a profit. do you? The question was about the effect of specific transactions, not what spins off of those trasnactions. Read the questions but don’t read into them.
I don’t see how you can say “don’t read into them.” 70% of the questions I have come across in FSA are multiple-step questions, especially those relating to inventory methods, issuance of debt and cash flows.
Sometimes you need to have approach a question using a broad understanding of context, I agree, but other times that’s clearly not the case, and this is an example. Here’s a follow-up question to get you thinking. Besides a zero, name 3 other ways that the issuance of debt will have no effect on CFO in the year issued.
I see your point, I still don’t think this question is clearly objective, I’ve defiantly seen more cut & dry questions. You have me stumped on the 3 other way to issue debt w/o affecting CFO other than an increase in interest payable. What are the other 2?
I think they want to mean “Which of the following answer is the most accurate for CFO?” CFO is affected by increases in inventory and long-term debt Inventory, Long-Term Debt a. Decrease, Increase b. Decrease, No Effect c. Decrease, Decrease d. Increase, Decrease
Well, if you issue on 12/31 there’s no interest so no CFO. If, for example, you issue 12/1 but pay quarterly interest, there’s accrued interest (as noted) but no CFO since adjustment for the increase in accrued interest will negate the interest expense component of Net income. In retrospect, not so sure about the third one. If the bond were convertible and converted before the first interest payment date, or callable and called… but I’m not sure logistically how accrued interest is treated for those.
Agreed. But how often do you issue bonds on New Year’s Eve (outside of text books?). Also I’m not sure of the accounting of the third, I think interest would still be accrued & expensed but not paid in cash, maybe applied to APIC, although it may be paid pro-rata, I would think it depends on the indenture. I’d have to look that one up, in either case I haven’t seen anything like that in the CFAI text, so I’ll just hope it doesn’t show up on exam day. Thanks for the help.