Which of the following statements about accounting procedures and their impact on the statement of cash flows is least valid? All else equal: A) a company that finances through common stock issues may have the same cash flow from financing (CFF) as a firm that issues debt. B) the cash flow from operations (CFO) for a company that has a capital lease will be overstated compared to that of a firm that has an operating lease. C) a nonprofitable company that uses LIFO to account for inventory will have higher total cash flow than a nonprofitable company that uses FIFO during a period of rising prices. D) the cash flow from operations (CFO) for a company that issues a bond at a premium will be understated compared to a firm that issues a bond at par.
B? CFO is understated with capital leases. For capital leases the interest expense (CFO) is smaller than the total monthly payment. Interest expense = remaining value of lease x lease cost, and monthly payment = interest expense + debt repayment. Remember a capital lease is like a loan, so each payment pays back interest + capital.
I think B is correct. Wouldnt CFO be overstated for for cap lease because Depreciation is charged to CFI rather than the entire expense to CFO in the operating lease format ?
I think its D just through the process of elimination
I think D is also correct. CFF overstated CFO understated.
Isn’t it C. Total CF’s are the same? Edit: I think I’m wrong, LIFO CF’s should be higher… not sure what the answer is
I think this one is C. Both companies are nonprofitable, one uses LIFO in rising prices, will have higher COGS than a company using FIFO in rising prices. A is correct, issuing new shares is a financing inflow, just as issuing debt. B is correct, a company that capitalizes a lease will have a higher CFO (in the sense that its final CFO would be higher since the expense would be a CFI outflow) than one that books an operating lease (where the outflow is CFO). D is correct, issuing a bond at premium overstates CFF, understates CFO, while a company issuing a bond at par will neither overstate nor understates CFF or CFO. Is C the answer?
I don’t think C is right because cash flow isn’t affected by inventory method if taxes aren’t a factor for either
I definitely concur with map1
Except I would I would change the explanation for B. If a company capitalizes a lease, the cash payment of the lease each year will be allocated between CFO and CFF (if you are the lessee). This has no affect on CFI. Because CFO is the interest expense, and CFF is the amortization of the outstanding balance of the liability, CFO will consistently be higher for a capital lease in comparison to an operating lease. I think they are asking from the lessee side, not the lessor…
map1 , You are correct. Answer is C. Point is that companies are non-profitable … thats what makes C least valid.
right, CFF not CFI, the repayment under the capital lease is like a repayment on installments debt, thanks for bringing it up!
I just used process of elimination: A) a company that finances through common stock issues may have the same cash flow from financing (CFF) as a firm that issues debt. B) the cash flow from operations (CFO) for a company that has a capital lease will be overstated compared to that of a firm that has an operating lease. C) a nonprofitable company that uses LIFO to account for inventory will have higher total cash flow than a nonprofitable company that uses FIFO during a period of rising prices. D) the cash flow from operations (CFO) for a company that issues a bond at a premium will be understated compared to a firm that issues a bond at par. A. This could be true, whether you issue debt or equity it’s going to be a CFF outflow/inflow. B. CFO on a capital lease is going to be higher than CFO from a Operating lease. The payment is split between Operations and Financing. Depreciation is a not a cash flow C. I was unsure about this choice. D. A premium bond is going to understate CFO because your interest expense is lower than your coupon because you calc the expense based on the market rate at the time. By default the answer is C.
The answer is “C”. It is a profitable company, not an unprofitable company.
D should be right because regardless of the fact it is for profit or non profit-you pay less taxes due to higher COGS… You do whatever you want with the profit later-you can through it in the mississipi for all I care. D should be the wrong one because at a premuim the Book value is higher than par but the intrest % is lower so you pay less intrest compared to a bond bought at par and hence this negative CFO component is lower or understated but over all CFO is overstated because CFO is cash flow from operations so intake minus out of the box. You have less out so CFO should be overtsated. Right CHARU?
If you are not a profitable company it means you have negative Net Income, thus you don’t pay any taxes. The only cash flow differences between LIFO and FIFO is through taxes. If you don’t pay any taxes then there is no cash flow differences between the two methods. So the answer should be C. Correct me if I am wrong.