Confusing answer

CFA Level I FRA
#1

I came across this question.

Dart Corporation engaged in the following transactions earlier this year: Transaction #1: Retired long-term debenture bonds with a face amount of $10 million by issuing 500,000 shares of common stock to the bondholders. Transaction #2: Borrowed $5 million from a bank and used the proceeds to purchase equipment used in the manufacturing process. With respect to these transactions, should Dart report transaction #1 as a financing cash flow and/or transaction #2 as an investing cash flow? A) Only one should be reported as such. B) Neither should be reported as such. C) Both should be reported as such. Answser was A when I thought it would be B

Because transaction #2 is not just investing cash flow it does say" borrowed $5 million from bank. This portion is financial activity from my perspective (although there is no interest mentioned I didn’t think bank would lend without interest)

So I thought transaction #2 is financing and investing cash flow not just investing flow.

Are questions like this asked in the exam or do they make it clear in the exam?

Thanks

#2

This is not a well-worded question.

Their point is that you do not need to report transacton #1 as a financing cash flow because the net effect (to CFF) is zero: +$10 million from issuing stock (CFF inflow) and -$10 million from retiring debt (CFF outflow). Transaction #2, however, should be reported as if it were two separate transactions: borrowing $5 million (CFF inflow), and paying $5 million for machinery (CFI outflow).

The questions on the real exam will be clear.

#3

ok… thanks…

#4

You’re welcome.