Just finished ~100 questions about cash flows, here are a couple of good ones, please post some more if you have any: 1- The cash flow impact from gains or losses on foreign exchange (currency) translation would appear on the statement of cash flows as: A) Part of the reconciliation of net income to cash flow from operations. B) A separate line item under cash flows from investing activities. C) A separate line item under cash flows from financing activities. D) A separate line item below the operating, investing and financing sections. — 2- Which of the following events would be recognized as a cash outflow in the financing activities section of the statement of cash flows? A) Borrowing under a revolving line of credit in order to buy shares of an acquired company. B) Debt of an acquired company assumed by the parent company. C) Proceeds from selling new preferred shares. D) Issuance of a stock dividend. — 3- Firms that sell their accounts receivable and use the proceeds to reduce their debt distort the pattern of cash flow primarily from: A) Financing, but this distortion is offset by a similar distortion in cash flow from operations, so no adjustment is necessary when calculating the firm’s financial ratios. B) Financing, and analysts should switch the amount of receivables sold from current liabilities to long-term debt when calculating the firm’s financial ratios. C) Operations, but this distortion is offset by a similar distortion in cash flow from financing, so no adjustment is necessary when calculating the firm’s financial ratios. D) Operations, and analysts should reverse the sale by increasing the firm’s receivables and treating the proceeds of the sale as debt in computing the firm’s financial ratios.
d c d
1D 2C 3D
D, C, D
strangedays nailed it, but then he edited #2 and lost 1 mark :’( here is the explanation: 1- Choice “D” is correct. For companies that have engaged in cash transactions that involve foreign currencies or that have multinational operations, the line item “effect of exchange rate changes on cash” would appear below the CFO, CFI, and CFF sections on the statement of cash flows. Under U.S. GAAP, these translation effects are reported separately so that the effect is isolated from the other period-to-period changes in the balance sheet line items. 2- Choice “A” is correct. Borrowing under a revolving line of credit would be a cash outflow under the financing activities section. – FYI ‘c’ is incorrect because it is a cash inflow. 3- Choice “D” is correct. A reduction in receivables is an operating cash flow. This normally represents a cash inflow as a customer paid for a previously purchased item. Selling receivables distorts the meaning of the resulting operating cash flows. The analyst should reverse the sale when computing financial ratios. This was definitely one of my weakest areas, now it’s time to review my other FSA nemesis: SS9.
issuing prefs is a financing activity though I thought?
foreign currency adjustment skips income statement appears in below CFO,CFI, CFF 1) D 2) A (straightforward) 3) D
Why C for 2nd question? the question asks for cash outflow, not inflow. proceed would be inflow in Financing section. For the same reason A can’t be the answer. But B and D are out. so stuck with guessing between A and C
right…cause 2C is inflow in fact, and B and D are noncash transactions.
oh snap, didnt read the question entirely, didnt see that outflow, thanks map
> Choice “A” is correct. Borrowing under a revolving line of credit would be a cash outflow under the financing activities section. – FYI ‘c’ is incorrect because it is a cash inflow. This statement is incorrect. Borrowing under a revolving line of credit would be a cash inflow (NOT outflow) under the financing activities section. But, what they then did with the cash inflow is that they *bought* another company, thus the outflow.
Thanks Dreary, I missed that when reading the answer from Stalla, I have a question: Under what circumstances is borrowing money to purchase a company considered a financing outflow? The way I would consider it is: Borrowing money - financing inflow Purchasing company - investing outflow --or-- Receiving company and taking on debt (non-cash) Why is this a financing outflow? Thanks Dreary or anyone else who can clarify.
Because shares of an acquired company are bought, that’s sort of like treasury stock.
I agree, it’s like map1 said. Although, I’m not sure if there is a diffrence in treatment if this were a consolidated affiliate or not. If you remeber that if the purchase is for less than 50% of the acquired company, then this is considered unconsolidated and you would use the equity method for accounting. This means the acquired company becomes an asset, and no need to consolidate the financials of the two company.
Unconsolidated if less than 50%, consolidated if more than 50% but less than 100%, acquired is 100%. Anything less than 100% and it would be an investing cash flow.
Thanks Dreary and map1, the answer makes sense now.
> Anything less than 100% and it would be an investing cash flow but here it is financing cash outflow.
Dreary Wrote: ------------------------------------------------------- > > Anything less than 100% and it would be an > investing cash flow > > but here it is financing cash outflow. I think that all movement of the NW are considered CFF (except for dividend) the less than 50% it is considered normal participations and included as financial fixed assets, hence a variation in CFI will be recorded
1 and 3 are D, that I get. 2 is tricky.