Excerpt from CFAI 2008 Sample Exam 2, Q26 Durango manufacturing receive interest income from some surplus funds they have invested in corporate bonds. The interest income they receive would be classified as which activity for financial reporting purposes? A) Operating B) Investing My answer A CFAI gave B as the answer. Assuming GAAP, shouldn’t any interest received be classified as an operating cash flow? Thanks!!
This one confused me as well but I think the explanation was to do with the fact that it’s a manufacturing company and it’s not in the business of invsting or lending money so should be classified as CFI… That’s a shtty Q tho… there won’t be one as vague as that on the real thing.
I feel like I have seen this question a few times, esp in the two column format where they say if a bank receives int and a manufacturer receives int, how should they be categorized. Since a bank is in the biz of owning investments, it is CFO for them (normal operations), and since rec’d int as a manufacturer is not day to day ops, it should be CFI
But if we assume treatment under GAAP? Then would you all still stick to CFI? Or then would it become CFO then??
rish Wrote: ------------------------------------------------------- > Excerpt from CFAI 2008 Sample Exam 2, Q26 > > Durango manufacturing receive interest income from > some surplus funds they have invested in corporate > bonds. The interest income they receive would be > classified as which activity for financial > reporting purposes? > > A) Operating > B) Investing > > My answer A > > CFAI gave B as the answer. Assuming GAAP, > shouldn’t any interest received be classified as > an operating cash flow? > > Thanks!! We’re not talking cash flow here. Be very careful on this one. Remember back in one of the early FSA chapters (p 36), it talked about dividing the company’s activities into three functions: operating, investing, and financing. There was no discussion about cash flow whatsoever. Page 37, read the paragraph right below exhibit 1. Interest expense/earned is NOT part of operations (think of what EBIT, which is similar to OPERATING income, stands for) when you are not a financial services firm. Generally speaking, offsetting of data is not allowed with the exception of interest. So at times, you’ll see a firm report “Net Interest” under non operating activities. That includes interest received minus interest paid. Refer also to section 5.5 on page 170. Also, when refering to the statement of cash flows, interest from cash equivalents and trading securities are part of operating activities, even when not a financial business. P 252. Just thought I’d throw that in too.