# CFO indirect method

A company had the following changes in its balance sheet accounts Net sales = 500 An increase in accounts receivable = 20 An decrease in accounts payable = 40 An increase in inventory = 30 Sale of common stock = 100 Repayment of debt = 10 Depreciation = 2 Net income = 100 Interest expense on debt = 5 The company’s cash flow from operations is : A. 10 B. 12 C. 92 D.192 What is wrong with my calculation? Net income + depreciation + Repayment of debt - sale of common stock - increase in inventory - decrease in accounts payable - increase in accounts receivable

You are looking for CF from operating… not total CF. That being said, you need to omit stock and debt transactions.

CFO = Net income + add back depreciation - increase in inventory - decrease in accounts payable - increase in accounts receivable CFO = 100 - 20 - 40 - 30 + 2 = 12 = B?? - Dinesh S

Repayment of Debt would not be CFO Sale of Common Stock is not CFO Interest expense on Debt is CFO NI + Depr - Inc AR - Dec AP - Inc Inv - Int Exp = 100 + 2 -20 -40 - 30 -5 = 102 - 95 = 7

cpk - int exp is already in net income

Dinesh – what happened to Interest expense…

my mistake… Sorry about all the other posts… thanks apcarlso

B?

B, considering 7 is not an answer.

B.

dinesh – we both made the same mistake. interest exp would get deducted in the direct method… not in indirect bcos NI already has it. you were right the first time.

Yes cpk, It’s pretty confusing … when you are in the middle of coding a dumb software that does no good to anybody

B

Thank you guys. But shouldn’t sale of common stock be deleted from the net income specifically because it is not CFO but is included in net income? Same goes for repayment of debt. Net income would be reduced by 10 but since we want the CFO , shouldn’t we add back the repayment of debt. We would ignore these two in the direct method, but shouldn’t we adjust for them in the indirect method?

where is common stock included in Net Income. It is a balance sheet item - because that goes into the Equity Portion of the Balance sheet. Repayment of Debt goes into the Balance Sheet - as a Long Term debt reduction. Both of these do not go into the Income statement… from where the Net Income is obtained.

Thank you cpk123. Now I get it.

cfadecember - make note that issuing stock or purchasing treasury shares are financing acitivities, not operatin. here is the way i remember it… if a stock transaction affects your capital structure, it is financing.

Thank you apcarlso. So only CFO and CFI are included in the income statement. I got confused with the indirect method using net income.

CFI may or may not be included on the income statement - the only element of CFI that would be included on the income statement is PROFIT/LOSS on the sale of an asset. If you buy a machine with cash for £10,000, then a £10,000 asset goes on the balance sheet (the machine) and cash decreases by £10,000. On the cash flow statement, there is a £10,000 debit, which is a cash flow from investing. On the income statement, there is no entry (bar any depreciation).

cfadecember - I guess I can’t think of any CFF that are included in the Income Statement. I’m not sure if it is totally safe to say only CFO and CFI are included in the Income Statement