Question: CFO Direct Method

An analyst gathered the following data about a company: -Collections from customers are \$5,000 -Depreciation is \$800 Cash expenses (including taxes) are \$2,000 -Tax rate = 30% -Net cash increased by \$1,000 If inventory increases over the period by \$800, cash flow from operations equals: A. \$1,600 B. \$2,400 C. \$3,000 D. \$4,000

5000 (Collections from Cust) - 2000 (Expenses) = 3000 Expenses includes the impact of the Inv. Increase (which is a distractor here).

yes, C is the correct answer. However, why is change in inventory not included? Cash input = -COGS - Increase in Inventory + Increase in AP I don’t understand…

expenses already includes that…

C? 5000-2000=3000 although, i dont understand why the inventroy increase isnt taken into account???

For Bluey and SleepyBird Cash Expenses = -COGS + Delta AP + Delta Inv + Other Expenses (and includes Interest, Tax too as stated in the problem above). Delta Inv and Delta AP would be with the +/- sign as needed. CP

ahhhh good point cpk… the only reason i got it correct was cos there was no aanswer that took the inventory of 800 into account… if there was i would’ve surely got it wrong

OMG, so if it says cash expenses include taxes, we have to extend our assumption that it also includes delta inventory? What if it didn’t say? Do we always assume it includes delta inventory and all others? My calculated answer was \$2,200 so I chose \$2,400 as it is the closest answer. I was actually thinking of choosing C!

So it would be safe to assume Cash Expense includes Inventory purchases?

Cash expenses= cash expenditures related to all lines on the income statement. You don’t worry about delta inventory, just as you don’t worry about delta accounts payable, which is where the credit side of all inventory purchases goes.