The following information is derived from the financial records of Brown Company for the year ended December 31, 2004: Sales $3,400,000 Cost of Goods Sold (2,100,000) Depreciation (300,000) Interest Paid (200,000) Gain on Sale of Old Equipment 400,000 Income Taxes Paid (300,000) Net Income $900,000 CFO = ? The answer is: net income: 900,000 + depreciation 300,000 - gain 400,000 = 800,000 What about the interst paid!!! Shouldn’t the interest paid be added back to CFO?? or am I totally wrong, and interest isn’t included when using indirect method…
Well I think its assumed that the interest paid is equal to the interest expense for the year since they do not give us any change in the balance sheet accounts. that means that when considering net income the interest expense=interest paid in this case was already deducted With the remark that interest paid is an operating cash outflow
For the indirect method: CFO = 900 (NI) + 300 (Depr) - 400 (Gain on Sale of equipment) = 800 From the direct method CFO = 3400 (Sales) - 2100 (COGS) - 300 (IT Paid) - 200 (Int Paid) = 800 yancey - hope this answers your question.