# Desperately need help on 2 CFA sample questions

An analyst gathered the following information about the new capital lease obligation as company made at the beginning of the year, annual end of year payments - 16,000 term of the lease - 10 years appriopriate discount rate - 10% depreciation method - straight line salvage assumption - 0 salvage value In the first year of the lease, the cash flow from financing section of the lessee company’s statement of cash flows will contain a lease related sash outflow that is closest to: A 6,169 B C D Answer is A, I have NO idea how to think about this question at all! I only know it will over state operation cash flow, and understand investing cash flow. How do I actually calcuate the number? and what does that to do with financing? Please help! ============================================================= An analyst has determined that Megamore Industries uses the LIFO inventory method. Megamore’s reported gross income for the year is most likely to be overstated and require adjustment by the analyst if, during the year, Megamore experienced a(n): A. increase in inventory prices. B. decrease in inventory prices. C. increase in inventory quantities. D. decrease in inventory quantities. Can B and D be both correct? Thanks a lot!

For 1: This is what I think…I don’t have the exact answer though…maybe Iam missing something, but the concept is something like You need to calculate lease amortization Step1: Calculate carrying value of lease: PMT= 16,000, i =10%, n=10, PV = ? --> \$98,313. Step2: Yearly interest expense = 10% * 98,313 = 9,831.3 (Reported in CFO) Step 3: Total lease payment - interest expense(CFO) = lease amort(CFF) => 16,000 - 9,831.3 = 6,187.7 EDIT: 16,000 - 9831.3 = 6169…its too late in the day for me

For the second, D is the correct answer. If the prices are falling LIFO GI > FIFO Gross income, but it reflects the ecomic reality (decreased prices), thus it is not “overstated” But, if there is LIFO liquidation (decreased qty), that is an artificial increase in gross profit, and thus is “overstated”

The first. PV of the Cap. Lease is 98313. So i have to pay 98313*10%=9831 interest. But I pay 16.000 each year. So (only) in the first year there are 6169 left. Interest is CFO - the rest of the lease action is CFF. The second. In case of LIFO Liquidation you have to make adjustments. If prices decline, LIFO is still the best indicator for your current costs.

On the first one, how would you calculate the 2nd year cash flows if this were asked. I know you would subtract the principal amount of \$6169 from the \$98,313 to get interest expense. Would you also subtract depreciation?

2nds year PV(Lease) 98313 - 6169 = 92144 Interest = 9214.4 (CFO) Depr = 9831.30 Total Lease Expense = 19045.70 Reduction in Lease Principal = 16000 - 9214.4 = 6785.6 (CFF outflow). CP

We would include the depreciation in the accummalated depreciation account. It will not impact the on balance sheet lease. 2nd year carrying value = 98,313-6169 = 92,144 Interest = 9214.4, lease amort = 6786.EOY2 carrying value = 92,144 - 85,358 and so on moto376 Wrote: ------------------------------------------------------- > On the first one, how would you calculate the 2nd > year cash flows if this were asked. I know you > would subtract the principal amount of \$6169 from > the \$98,313 to get interest expense. Would you > also subtract depreciation?

We would include the depreciation in the accumulated depreciation account. It will not impact the on balance sheet lease. 2nd year carrying value = 98,313-6169 = 92,144 Interest = 9214.4, lease amort = 6786.EOY2 carrying value = 92,144 - 85,358 and so on moto376 Wrote: ------------------------------------------------------- > On the first one, how would you calculate the 2nd > year cash flows if this were asked. I know you > would subtract the principal amount of \$6169 from > the \$98,313 to get interest expense. Would you > also subtract depreciation?