Use the following financial data for Moose Printing Corporation, a U.S. GAAP reporting firm, to calculate the cash flow from operations (CFO) using the indirect method.
- Net income: $225
- Increase in accounts receivable: $55
- Decrease in inventory: $33
- Depreciation: $65
- Decrease in accounts payable: $25
- Increase in wages payable: $15
- Decrease in deferred taxes: $10
- Purchase of new equipment: $65
- Dividends paid: $75
The correct answer according to Kaplan is an “increase of cash by 248” with the below explanation:
CFO for Moose Printing Corporation is calculated as follows:
+Net Income $225 − A/R $55 + Inventory $33 + Depreciation $65 − A/P $25 + Wages Payable $15 − Deferred taxes $10 = $248.
The purchase of new equipment is an investing activity and therefore is not included in CFO. Dividends paid is a financing activity and is not included in CFO.
Why do you not add back the purchase of new equipment (thus have CFO as 313, =248+65). In other examples you see that you subtract out a gain from sale of land (CFI). The purchase of new equipment is CFI, so why do you not ADD that back in just as you SUBTRACT gain from sale of land?