CFA Level 1 Financial Statement Question, Help me!

Based on the following information for Star Inc., what are the total net adjustments that the company would make to net income in order to derive operating cash flow?

Year Ended
Income Statement Item 12/31/2010
Net income $20 million
Depreciation $2 million

Balance Sheet Item 12/31/2009 12/31/2010 Change
Accounts receivable $25 million $22 million ($3 million)
Inventory $10 million $14 million $4 million
Accounts payable $8 million $13 million $5 million

A.Add $2 million.

B.Add $6 million.

C.Subtract $6 million.

The Answer on the book is below
B is correct. To derive operating cash flow, the company would make the following adjustments to net income: Add depreciation (a non-cash expense) of $2 million; add the decrease in accounts receivable of $3 million; add the increase in accounts payable of $5 million; and subtract the increase in inventory of $4 million. Total additions would be $10 million, and total subtractions would be $4 million, which gives net additions of $6 million.

Is the answer incorrect? Shouldn’t the decrease in accounts receivable been negative? which indicates +2-3+5-4=0?


What happens that causes A/R to decrease?

1 Like

Thank you! I think I made a mistake in reading the question. The AR should be negative, and we should subtract negative which cause it to be positive. Thank you!

My pleasure.