Exibit 2 shows a CFO statement with Decrease/(increase) in Short Term investments of 15.2
Adjustment 1 is given as - Short term investments should not be classified as available for sale securities instead of trading securities.
Question 10 asks you to make an adjustment based on this.
So … we have a decrease in short-term investments of 15.2 … if we assume they were available for sale securities but need to be reclassified as trading securities, you’d just add them to OCF but they are already in OCF. Answer says you add it into OCI?!
What am I missing?
Adding this amount backc to OCI would indicate that it was once treated as AFS and is now being treated as Trading Securities.
So, we had these investments that were considered short term investments (i.e. - Should have been trading securities ) but instead we treated them as Available For Sale. As a result, we had a loss of 15.2 and so we subsequently reduced OCI.
Now, we’re readjusting so that they are rightfully cateogrized as Trading Securities. To do this we’ll have to remove the effects of the reduction in OCI by adding back our losses. That’s what they’re doing here.
Also, as long as we don’t sell our investments (realize a gain) they wouldn’t impact cash flows, since they’re unrealized at this point
Thanks for your response. I’m still confused though.
The question is asking you to make an adjustment to OCF, not OCI. The answer shows them adding the prior loss back to OCF, not OCI.
I still don’t get it. If you were reclassifying a cash flow from the purchase of a security from AVS to trading then you’d take the cash outflow from OCI, where AVS hits cash flow, and add it back to OCI to negate the effect. Then you’d take that cash outflow and subtract it from OCF. Is that incorrect?
I’ll have to take a look when I get in front of my schweser book. Just to be clear here, you’re aliasing OCF to mean Cash Flow From Operations, and OCI to mean Other Comprehensive Income, correct?
I just want to make sure you’re not confusing OCI with CFI, or Cash Flow From Investments
You’re right, I was confusing the acronym. Just replace OCI with CFI … I still think I have it right though.
If the purchase of a security was misclassified as AVS as opposed to TS, you’d account for the purchase through CFI. To adjust, you’d negate the impact to CFI and take impact in CFO.
Now that you’ve pointed out my confusion on the acronym I see what you’re saying in your original reply. Which makes sense given my original comment mentioning adding to OCI 
However, that still doesn’t explain why there would be an impact to OCF from an AVS security.
I took a look, and syntax wise the sentence doesn’t even really make sense.
I’m wondering if they meant to say: Short term investments should _ now _ be classified as avaialble for sale securities instead of as trading securities.
If that’s the case, the removal from CFO to CFI makes perfect sense…
I don’t have access to the errata, but it wouldn’t surprise me if that’s in there
Yea … just heard back from Schweser - it’s an error. Should be as you say. 3rd confirmed errors in EOC questions and I’m only 3 topics in. Nice.
funny how much of a difference one letter will make on the outcome of a problem