An analyst gathered the following data about a company: Sales: 5000 Dep: 800 Cash Expense: 2000 If inventory increases over the period by $800, CFO is A. 1600 B 2400 C 3000 D 4000 The answer is c, I can understand in the direct method, the dep shouldn’t be counted in, but why the inventory be excluded also?
Because I think it’s included in cash expenses. They tricked you. (And me, when I first saw this problem)
ops, just hope won’t see any ambiguous question like this tomorrow, thx dude, good luck
Lame. I hope they don’t resort to parlor tricks like that on the actual test.
well its not that tricky…the answer you are suppose to get if you include the 800 is 2200, which is not an answer choice. At that time you say to yourself WTF? Being that there are only like 4 numbers in the question and you KNOW Dep is not included, you are only left with 2 numbers. The only logical choice is 3k.
This is as about as simple as a question on the direct method as you can get. The direct method is: I RECEIVED this much CASH from sales/revenues. I PAID this much cash for expenses. That’s it. Is depreciation cash? That’s easy, no. You even know that if you understand indirect Is an inventory increase cash? Maybe yes, Maybe no. Maybe it was doen thru payables. But what we do know is that inventory relates to CGS, and if they tell you the cash expenses then it is acovered. This is true of any ther current asset or liability whose offset entry could be another non-cash working capital account.
I think Super I answered this question the same time last year when I was sitting for LI… And if you’re a level I candidate and taking the exam tomorrow… why aren’t you asleep??? Good luck to all…
who sleeps at 8:45pm?