curriculum book3 p295 q15 and p296 q17

for q15, should dividend be added back to net income to get CFO? i do not find the formular anywere on the book. for q17, the stores reported \$25M net income, but the retained earnings change was only \$15M, should it be \$25M too?

wolwol, Dividends to shareholders are treated as outflows from financing activities. Do not add them back to net income. If net income was 25 million and retained earnings 15 million, that means that 10 million was paid to shareholders, i.e. cash outflow from financing activities.

RE Beg + NI - Dividends = RE Ending This is the flow formula that was tested in the exam in Dec. They had given a Cashflow question, and the RE Earnings accounts, as well as the Dividend, but asked to calculate the CFO. So you needed to use the above to get to the NI portion which helps to start out for the Indirect method. CP

CP, I fully agree. But, in wolwol’s example net income is already given.

My statement was a general statement, not related to wolwol’s example.

i will put the whole question here. q15 An analyst gathered the following information from a company’s 2005 financial statements (\$ millions) ____________________________________________________ balance as of year ended 31 december 2004 2005 retained earnings 120 145 accounts receivable 38 43 inventory 45 48 accounts payable 36 29 _____________________________________________________ the comany declared and paid cash dividens of \$10 million in 2005 and recorded depreciation expense in the amount of \$25 million for 2005. The company’s 2005 CFO (\$million) was closet to A 25 B 35 C 45 D 75 this was a cfa 2005 exam question.

q17 Jaderong Plinkett stores reported net incoming of \$25 million, which equals the company’s comprehensive income. The company has no outstanding debt. Using the following information from the comparative balance sheets (in millions). what should the company report in the financing section of the statement of cash flows? __________________________________________________________ balance sheet item 12/31/2005 12/31/2006 Change common stock \$100 \$102 \$2 additional paid-in capital common stock \$100 \$140 \$40 retained earnings \$100 \$115 \$15 total stockholder’s equity \$300 \$357 \$57 __________________________________________________________ A issuance of common stock \$42 million; dividend paid of \$10 million. B issuance of common stock \$38 million; dividend paid of \$10 million. C issuance of common stock \$42 million; dividend paid of \$40 million. D issuance of common stock \$38 million; dividend paid of \$40 million.

This looks exactly like the qn from the Dec 2007 exam. From my explanation above 120 + NI - 10 = 145 So NI = 155 - 120 = 35 Now for CFO NI: 35 Add Depr: 25 Increase in AR : (5) Increase in Inv: (3) Decrease in AP: (7) So CFO = 35 + 25 - 15 = 45 So Choice C

For q17 NI = 25 RI Beg = 100, RI End = 115 So 100 + 25 - Div = 115 Div = 10 Million ==> CFO Outflow From the Balance sheet accounts: Common Stock has increased 42. which is a CFF Inflow. So A issuance of common stock \$42 million; dividend paid of \$10 million.

RE Beg + NI - Dividends = RE Ending where is this formular from? I could not find it on the curriculum. cpk123 Wrote: ------------------------------------------------------- > This looks exactly like the qn from the Dec 2007 > exam. > > From my explanation above > > 120 + NI - 10 = 145 > > So NI = 155 - 120 = 35 > > Now for CFO > > NI: 35 > Add Depr: 25 > Increase in AR : (5) > Increase in Inv: (3) > Decrease in AP: (7) > > So CFO = 35 + 25 - 15 = 45 > > So Choice C

dividend is part of CFO or what? and the company issued \$42M new stock, they kept \$2M and sell to the public \$40M how did they keep \$2M, they just kept it? cpk123 Wrote: ------------------------------------------------------- > For q17 > > NI = 25 > RI Beg = 100, RI End = 115 > So 100 + 25 - Div = 115 > Div = 10 Million ==> CFO Outflow > > From the Balance sheet accounts: Common Stock has > increased 42. > which is a CFF Inflow. > > So > A issuance of common stock \$42 million; dividend > paid of \$10 million.

That is not a formula you would find anywhere. think about it… when a company has +ve NI – what are the two possible ways it could use that money? 1. Pay Dividends. 2. Retain it. So that is how the Retained Earnings Account is created on the Balance Sheet. And this is the relationship that must be known. I am pretty sure this is present in the First FSA chapter for L1 this year. I attended Peter Olinto’s free session from Stalla on Jan 12 (while I was still waiting for my L1 results) and he definitely stated this in the seminar as well. Regards CP

No Dividend is a part of the CFF. and it is a CFF outflow. They issued Common Stock to the tune of 42 Million\$. Out of that \$2 Mill. is the PAR value of the Common Stock. 40M is the Additional value because they sold the stock for more than its par value. Additional paid in capital - Common Stock Change = 40M Any Stock issuance is a CFF Inflow. CP

so the company can claimed they have 102M common stock even if all the stocks are in the hands of public? cpk123 Wrote: ------------------------------------------------------- \> No Dividend is a part of the CFF. and it is a CFF \> outflow. \> \> They issued Common Stock to the tune of 42 \> Million. > > Out of that \$2 Mill. is the PAR value of the > Common Stock. > 40M is the Additional value because they sold the \> stock for more than its par value. \> \> \> Additional paid in capital - Common Stock Change = \> 40M > > Any Stock issuance is a CFF Inflow. > > CP

If all the stock that they want to issue is in the hands of the public – yes the Common Stock account is where it would go in. remember the bigger picture for the Balance Sheet. A = L + E And E(quity) = Common Stock + Additional Paid In Capital + Retained Earnings - Treasury Stock. So if they first issued Common Stock, then bought it back (retired some common stock, if you will), that becomes a Contra Account --> Treasury Stock on the Balance sheet. Retained earnings is the account through which the Balance sheet and the Income statement talk to each other.

I found the equation, on p42 of book3. Darn, I forgot it cpk123 Wrote: ------------------------------------------------------- > That is not a formula you would find anywhere. > > think about it… > > when a company has +ve NI – what are the two > possible ways it could use that money? > > 1. Pay Dividends. > 2. Retain it. > > > So that is how the Retained Earnings Account is > created on the Balance Sheet. > > And this is the relationship that must be known. > > I am pretty sure this is present in the First FSA > chapter for L1 this year. I attended Peter > Olinto’s free session from Stalla on Jan 12 (while > I was still waiting for my L1 results) and he > definitely stated this in the seminar as well. > > Regards > CP

E(quity) = Common Stock + Additional Paid In > Capital + Retained Earnings - Treasury Stock where is the above equation from? for the issuance of common stock, forgive me ignorance, if the company issued \$2M common stock, and the company did not repurchase any, then the public should have \$2M common stock, and the company had the money for selling \$2M common stock, in this case was \$42M. so the company should not have common stock at all, it only had the money, right? cpk123 Wrote: ------------------------------------------------------- > If all the stock that they want to issue is in the > hands of the public – yes the Common Stock > account is where it would go in. > > remember the bigger picture for the Balance Sheet. > > > A = L + E > > And E(quity) = Common Stock + Additional Paid In > Capital + Retained Earnings - Treasury Stock. > > So if they first issued Common Stock, then bought > it back (retired some common stock, if you will), > that becomes a Contra Account --> Treasury Stock > on the Balance sheet. > > Retained earnings is the account through which the > Balance sheet and the Income statement talk to > each other.

Yes that is where the Cash came from. That was used to Purchase Assets for the company. On the other side you have the Liabilities and the Equity accounts to account for. A = L + E Common Stock, Additional Paid In capital, Retained earnings and the Contra account (Treasury Stock) form parts of the Equity. I think, wolwol, you need to go thro the SS7 (first FSA section) in great detail. Even if you are spending some extra time now, this would stand you in real good stead later on. It is really critical that you understand the Financial Statements well. CP