Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted. The Regional Bank of Australia receives interest income on the loans it has outstanding. Durango Manufacturing Inc. also receives interest income on some surplus funds they currently have invested in corporate bonds. For each company, respectively, the interest income they receive would be classified as which type of business activity for financial reporting purposes? The Regional Bank of Australia Durango Manufacturing Inc. A. Operating activity Operating activity B. Operating activity Investing activity C. Investing activity Operating activity D. Investing activity Investing activity Anyone?
I believe that for the bank it would be considered an operating activity, and the manufacturing co. an investing activity, so B. Interest income for a financial institution would be considered a function of its business. For the manufacturing company, it is unrelated to the function of its business.
Isnt all interest received considered operating activity? You have to take into account the nature of the business? What about a holding company having a subsidiary as a bank? Interest rec’d would be operating?
Under U.S. GAAP, Interest recieved or paid is an operation activity. So it is A.
I am pretty sure it is B as well. Its an operating activity for a bank (they are in the business of making loans). It is an investment activity for the manufacturing company. Can someone confirm?
i would think it is A. I thought under GAAP all interest income was operating cash flow - but i’ve seen this question somewhere before - can’t remember. and i’m pretty sure the answer was B, because it threw me.
I thought B, for the business type reasons given above didn’t this come up in the CFA samples exam?
It is B…under GAAP CFI can be from ST investments other than those raised by the firm (debt or equity). Based on nature of business
i think you guys are confusing the diffrence in operation items in the income statement with nonoperation item in income statement based on the nature of the firm. this is a cahs flow statement question. Under GAAP, any interest earned must be reported in the CFO no exceptions.
yeah this is confusing. I’m pretty sure that under GAAP all interest income has to be operating. I think it’s the wording here that changes the answer. if you read the last sentence of the question, its not asking how the cash is classified it’s asking what type of business activity.
A has to be it. Jut your right, asking for classification of business activity but also states “for financial reporting purposes” All interest received or paid is reported as operating activity for all companies. Only IFRS allows flexibility.
Yes, thats what I thought that it should be operating for both. I would gladly ignore this question if it was from Schweser as I have come across vagueness like this before. But this question is from one of the cfai sample exams! I’d hate not to score full points on something so simple so A or B?
The answer is A. Isn’t cash flow statement one of the financial reporting statements ?
nope it’s B. actually just took the test this was from i knew it sounded familiar - i made a note of it cause I got fooled as well. it’s testing this LOS from SS 7 identify the groups (operating, investing, and financing activities) into which business activities are categorized for financial reporting purposes and classify any business activity into the appropriate group
- It’s a regional bank of Australia, why will it follow US GAAP?. Wont the bank follow IFRS or Australian GAAP? 2. Bank is a financial institution, so interest received would be part of business activity. So, it’s a interest income would be operating activity. 3. Interest income from surplus funds will be investing activity. Will go with ans B
spirit Wrote: ------------------------------------------------------- > 1. It’s a regional bank of Australia, why will it > follow US GAAP?. Wont the bank follow IFRS or > Australian GAAP? The question clearly states: “Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.” Therefore, A.
The answer is B. In the case of a bank, interest earned on loans outstanding is its primary activity and is therefore classified as Operating activities under IAS 7. You will learn more about this after studying for level 2. The interest earned by Durango Manufacturing is a result of its investing decisions, therefore it deserves its place in the investing section. A key here is to remember the reasoning behind classifying the cash flows in these categories. Operating CF sums the flows from activites considered core to a business, Investing CF sums cash flows from investing decisions of the company and Financing CF sums cash flows from the company’s decision to raise/pay back capital. For tips, discussion, questions, visit: http://cfaexamblog.blogspot.com/
jut111 Wrote: ------------------------------------------------------- > nope it’s B. actually just took the test this was > from i knew it sounded familiar - i made a note of > it cause I got fooled as well. it’s testing this > LOS from SS 7 > > identify the groups (operating, investing, and > financing activities) into which business > activities are categorized for > financial reporting purposes and classify any > business activity into the appropriate group I believe you are right jut. Unless I’m mistaken: - Under US GAAP, Interest Outflows are always included in CFO. For interest inflows, one must take the comps operations into account.
i did the sample with this question in it last night, and yes its b confused me as well, but that’s the answer