A company using the indirect method of presenting cash flows from operations shows an increase in operating cash flows from the previous year. Which of the following transactions most likely occured? A) An increase in unearned revenue B) An increase in accounts receivable C) A realized gain from the sale of equipment in the current year D) A change from straight line to accelerated method of depreciation
A) positive operating cash flow not reflected in net income -> correct B) cash outflow -> incorrect C) investing cash flow -> incorrect D) no effect on cash flows -> incorrect A is the answer
A) An increase in unearned revenue (false) B) An increase in accounts receivable (false, increase in receivables is cash outflow) C) A realized gain from the sale of equipment in the current year (false, you subtract from the EBITDA) D) A change from straight line to accelerated method of depreciation (True)
Indirect CFO : NI + Depreciation. If the company switches from SL to accelerated depr, higher noncash adjustment is made to NI. Unearned revenue - this would create liability and probably cash inflow at the same time. Since the question asks for Operating CF, i would go with D.
D
They say A They say an increase in unearned revenues will result in higher operation cash flows picture the indirect cash flow: Net income - change in current operating assets + change in current operating liablities. reasons? D seems right to me.
A: unearned revenue increase, cash increase, CFO increase —> correct B. An increase in accounts receivable, cash received decrease, CFO decrease --> wrong C. A realized gain from the sale of equipment in the current year results in CFI, so has nothing to do with comparing CFO of this year and prior year–> wrong D. A change from straight line to accelerated method of depreciation. The change could either increase depreciation or decrease it (early year, accelerated method dep > SL dep; in later year, SL dep > accelerated dep) --> wrong.
D is incorrect because depreciation is a non-cash charge and, therefore, has no impact on cash flows. Cash outflow due to taxes doesn’t get affected because depreciation method used for tax purposes is standard and has nothing to do with the depreciation method used in financial statements.
Answer is A. But net income is lower
This is a good one hopetobeat! I completelty forgot about the reversal effect on the SL method against the accelerated over the years. thanks
reversal effect is IRRELEVANT!
maratikus Wrote: ------------------------------------------------------- > reversal effect is IRRELEVANT! Not always…
I’d say A. increase in unearned revenue is an increase in liability hence must be added back to the CFO I always apply these rules to CFO: Add: Increase in liability, decrease in assets Less: Increase in asset, decrease in liability After you do this rule, you’ll find you are always right
I will say A… NI(in direct method) is positively increased by any increase in the following liabilities… Unearned Revenue … deferred tazes and accounts payable…
maratikus Wrote: ------------------------------------------------------- > reversal effect is IRRELEVANT! For this question, depreciation method counts because they use indirect method to reach CFO.
maratikus is right , depreciation method has no effect on cash flow. Net income includes a depreciation deduction and you add it back to negate its effect. If depreciation is higher, you add back a higher number, if its lower you add back a lower number. Either way its a non-cash item which means direct or indirect, it is not a factor in determining (or perhaps I should say a component of ) CFO
A … and IMO it doesn’t matter whether its INDIRECT method or DIRECT method … CFO will remain the same. pls correct me if i’m wrong here i was bloody retarded to go for C first… its an investing flow for chrissake