Sample Exam #1 -- Results and Possible Error

First, I scored 65%. It was unnerving to do a timed trial where I couldn’t skip certain questions and come back, but it was good practice. I finished with 44 minutes to spare, so I probably should have exercised better time management. I think there were two errors (this comes from my background as a CPA). Q 29: A fixed asset with a net book value of $500k is sold for $570k. The tax rate is 40%. What is the effect of this sale on the income statement? The correct answer is $70k, but I answered $42k. The explanation of the answer shows only the math related to the actual sale, not the tax cost associated with the sale. Note that the question did not ask for income from operations. I’m confused. Q 31: This question asks the candidate to identify which method would reduce cash flows from operations. I don’t recall the other two answers (one related to the securitization of accounts receivable). The answer I chose (which is wrong) is using short term debt to repay accounts payable. The explanation says that, “Using short-term debt to pay down payables will have no effect on cash flow from operations.” However, short-term debt could likely include the use of an unsecured line of credit from a bank, which would be a financing activity. Who’s right here? Thank you, Robert A

In my opinion explanation is right. Bcoz, When you replace (pay) your accounts payable through short term debt you have utilized the unsecured line of credit available from the bank. It is just a replacement of one account with the other in the current liabilities itself (accounts payable are gone and new current liablity in the form of short term debt is created) . The current liablity balance will remain the same. Thus no impact on the cash flow from operations. Hope will answere your query Thanks

Would the short term debt show as a cash inflow from CFF, then paying off the payables as a cash outflow from CFO?

I believe so. My understanding is that borrowings from a bank LOC are financing activities. dtrynoski Wrote: ------------------------------------------------------- > Would the short term debt show as a cash inflow > from CFF, then paying off the payables as a cash > outflow from CFO?

Q 29. If the choice is, NI increases by 42K, then, this is the correct answer. But if the choice is saying, EBT increases by 70K, then that is the correct answer. If the choices are just saying 1) increase by 70K 2) increase by 42K, then, in my opinion, the question is not framed correctly. Q 31. Your explanation seems reasonable. Reducing payables thru short term debt should increase CFF and reduce CFO. And the other choice ‘Sale of Receivables’ should increase CFO and not decrease CFO. So, this one is surely not correct. What is the third choice? May be that is more reasonably correct than ‘reducing payables thru short term debt’ choice.

I am having trouble with the financing account payables too. I can’t understand why the CFO wouldn’t change. My reasoning is the same with Robert A. Anyone has other ideas? Thanks

Q 29 referenced the income statement. I don’t recall is specifying income from operations, and certainly not EBT. Q 31: I’ve looked this one up directly in the CFAI text and I cannot find an answer that contracts my own conclusions. The only possibility is if somehow the direct assumption of trade payables by a bank is different that using short-term borrowings under an LOC. I know that if it comes up on the actual exam, I’ll make an inquiry after the fact.

One more thing regarding Question 31 I want to point out here which I guess will explain the correct answer is that short term debt is not the part of financing activity and considered as operating activity only. So if you use short term debt to provide cash for account payable one would be +ve transaction and other would be -ve and both will cancel out each other and net effect would be zero. correct me If I am wrong…

I believe you are incorrect. If you take out a short-term loan from a bank (i.e., a revolving line of credit), that loan is a financing activity.

ya I was incorrect actually I mixed short term investment held for trading with debt. short term debt is financing activity only.