Question Bank Issue - IFRS Dividends paid CFO or CFF

CFA Level I FRA
#1

I have an issue with one of the questions on Schweser Level 1 Question Bank:

Use the following financial data for Moose Printing Corporation 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
    A) Increase in cash of $248. B) Increase in cash of $173. C) Increase in cash of $183.

Your answer: B was incorrect. The correct answer was A) Increase in cash of $248.

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 would be an investing activity and, therefore, would not be included in the CFO. Dividends paid would be a financing activity and would not be included in the CFO.

So I was ton between A and B, knowing that under IFRS, dividends paid can be classified as EITHER Cash Flow from Operations OR Cash Flow from Financing.

I have had it recommended to me that when no accounting rules are mentioned (i.e. USGAAP or IFRS) - then assume IFRS. So how would you guys have answered thsi question knowing that the last item “Dividends” could be CFO or CFF.

Or am I missing something?

#2

Ah could it be something as subtle as the use of Dollars as the currency meaning we should use USGAAP?

Damn it!! lol

Mind you - it doesn’t HAVE to be referring to US Dollars does it…

#3

Dividends paid is usually CFF, even though it’s allowed to include them in CFO.

Use that by default.

#4

Thanks for the response - I guess the answer to this question would imply that you are correct in assuming we should classify dividends paid as CFF by default.

I guess this raises a more general question of other situations like this that occur, when two choices are valid but one should be chosen as default.

I don’t suppose anyone has a list anywhere - whether it’s just “ones they can think of” or something more formal. It would be a real shame to get questions “wrong” when in fact you answer was perfectly valid in the real world.

#5

Should be made clear on the CFAI questions.

#6

Never in my professional life have I seen dividends as a CFO. I understand its acceptable under IFRS, but I think its ridiculous and apparently so does every CFO in the world.

#7

Hi Geo - yeah I guess that shows up my complete lack of exposure to FRA in the real world - I work as a derivatives trader so little need to start clasifying cash flows etc.

What’s obvious to one, isn’t always obvious to another. Saying as this is preperation for the “real world” though, I guess that’s just the way it is :smiley:

#8

^ I’m sure there were derivatives questions that I felt the same on as you do about FRA. Just the nature of the game. However, I’d agree this is a bad question as your answer could technically be right.