In a statement of CFs presented in indirect format, which of the following would most likely decrease CFO: a) decrease in depreciation expense b) decrease in short-term non-trade notes payable c) cash dividend paid on common stock d) decrease in accrued interest payable on long-term debt
D.
a) because depreciation is added back to net income.
In a statement of CFs presented in indirect format, which of the following would most likely decrease CFO: a) decrease in depreciation expense NO CHANGE – non cash b) decrease in short-term non-trade notes payable This is a CFF c) cash dividend paid on common stock This is a CFF d) decrease in accrued interest payable on long-term debt So by elimination – it is Choice D CP
b&d are decreases in liabilities, and so deducted from CFO. c is not part of the indirect method. edit: cpk, this is the INDIRECT method, so we add back depreciation. less depr => less CFO.
Chrismaths – depreciation in a CFO question is always the Red herring. it is a non-cash expense – so it is being added back. It is not intended to increase / decrease the actual cash flow. You would see this being thrown as one of the choices in the SS-10 as well, when we talk of depreciation of long term assets. CP
A?
good job, cpk123. It’s D.
chrismaths Wrote: ------------------------------------------------------- > b&d are decreases in liabilities, and so deducted > from CFO. > c is not part of the indirect method. > > edit: > > cpk, this is the INDIRECT method, so we add back > depreciation. less depr => less CFO. cpk above is correct. B is NON-TRADE notes payable, part of CF from financing. D --> If this payable went down, it was because you used CASH to reduce it. Reduction of this short term liability is use of cash (from ops)
Notes Payable – is CFF – so it has to go to the CFF portion Only D interest payable becomes a CFO item, it is reducing – so it decreases CFO. Depreciation is ALWAYS non-cash. No impact on Cash Flow statement at all, it may increase, it may decrease – it has been taken out to arrive at Net income, it is being added back. If you had decreased depreciation expense – your net income would have been higher. so no change due to an increase or a decrease. CP
Super I, if it was a trade notes payable instead, it would be CFO, correct?
agreed, to decrease an accrued interest payable you need to spend cash…interest is a CFO outflow, therefore decrease CFO…cash div is CFF…decrease in short term notes payable isn’t an interest calculation, its retirement of debt that was LT and became ST, so its CFF… However, the depreciation one is messing with my head…i think D is best answer because it is clean, but all things equal from last year, isn’t a decrease in depreciation going to be less depreciation added back, and therefore decrease CFO…it sounds like a reach and thats why i went D here, also, that Depreciation isn’t a flow as much as an adjustment to NI that needs to be added back. thoughts?
In this particular question in the way it is formatted - if it had to have 1 right answer – that one would then have said “Increase in Trade notes payable” or “Increase in the Interest Payable” – so that would have eliminated the answer out!!! My way of working on this problem!. CP
Ok then, how about this: Net income = 200 Depreciation = 40 so CFO = 240. If Depreciation was 30, then holding everything else equal - you get 230. Ahhh, but then net income would automatically increase to 210. Think harder Chris!
Petetini - Simple income statement: Revenue 100 Depr (50) All other expenses (20) Net income 30 CFO: Net income 30 Add: Depr 50 CFO 80 Revenue 100 Depr (30) All other expenses (20) Net income 50 CFO: Net income 50 Add: Depr 30 CFO 80