P/CFO calculation in "Software Development Costs"

[hefore]

Example 7 of “Long-lived assets” (pages 432-434) asks you to calculate unadjusted and adjusted P/CFO. When calculating adjusted P/CFO, only the software development expenses are subtracted from CFFO.

Why is amortisation not subtracted from CFFO too? My understanding is that since the amortisation expense is removed from the income statement, it does not need to be added back to the operating cash flow. I would also be grateful if someone could explain why CFFO is reduced by $6,000 and not the after-tax amount.

Thanks.

[moxnguyen]

@hefore

btracted from CFFO too? My understanding is that since the amortisation expense is removed from the income statement, it does not need to be added back to the operating cash flow. I would also be grateful if someone could explain why CFFO is reduced by $6,000 and not the after-tax amount.

Since the amortisation is non-cash expense, just need to

1. Deduct actual cash software development expense (6,000) as CFO outflow
2. Increase the tax saving since you expensed the software development cost (6000 * tax rate) and Decrease the tax payment since you dont have amortisation anymore (2000 * tax rate) => Impact = increase the CFO = ((6000-2000)*tax rate)

[JuanCruise]

moxgnuyen’s asnwer is the technically correct answer. The CFAI answer is incorrect and should be reported as errata.