Cash Flows

Which of the following statements about accounting procedures and their impact on the statement of cash flows is least valid? All else equal: A) a company that finances through common stock issues may have the same cash flow from financing (CFF) as a firm that issues debt. B) the cash flow from operations (CFO) for a company that has a capital lease will be overstated compared to that of a firm that has an operating lease. C) the cash flow from operations (CFO) for a company that issues a bond at a premium will be understated compared to a firm that issues a bond at par. D) a nonprofitable company that uses LIFO to account for inventory will have higher total cash flow than a nonprofitable company that uses FIFO during a period of rising prices.


D would be my guess… assuming the tax credit is applicable only in future periods. Not A, as both equity & Bond financing should hit CFF. Not B, if operating lease, entire lease payment hit CFO, in capital lease only the interest portion of the lease (discount rate times capitalized lease balance) hits CFO, Principal payment is accounted for in CFF Not C, Premium bonds = higher coupon than market. The entire coupon payment is reported in CFO, but only the interest portion should be (market rate @ issuance * Book). The difference (premium amort) should be be reported in CFF. Thus CFF is overstated and CFO is understated. ?? D, The only impact FIFO/LIFO have on CFO is the impact of taxes. since there is no income, there should be no tax impact in the current period. If a firm is not profitable (-ve earnings i.e tax credits), lower the earnings, higher the tax credit (future??) --> higher future CFO. LIFO generally results in higher COGS when prices are rising.

ya, like you said, the answer is D, the companies are nonprofitable, so they don’t pay any taxes, in that case, there is no difference in the total cash flow of the 2 methods