Can someone please explain why CFO does not change? Is it because the items are bought on credit and so there is no impact on cashflow until BHG receives payment. The answer says that working capital will increase??? As far as I remember when Accounts receivable increase this is a use of cash and CFO will fall. how come working capital is being added to NI + non cash charges? Thank you
That’s because they have the matching principle by accounting for revenue even before they have received the actual amount, hence as revenue increases, NI increases (since the Tax Rate = 0) and NI will be overstated. Now looking at the Cash flow side of it. There was no cash inflow from the customers, hence that won’t change. Also for CFO calculations we start with Net Income (which is overstarted in our case) and then start adding back and backing out the Non Cash Charges, The Account Receivable is still the amount not received from the customers. change in AR = +ve CFO = NI - change in AR + bla … bla … bla So higher NI got down pushed by higher AR, hence the net amount cancels each other. So NI = overstated and CFO = no change
The 1st sentense should be reread as "That’s because they have *breached* the matching principle by accounting for revenue even before they have received the actual amount, hence as revenue increases, NI increases " I remember typing that word there, where could it have gone in the middle?
Hi, ok good point. my only question now is how come on page 314 the answer says: NI+noncash charges+increases in working capital… Probably I am going back to level 1 concept here. Shouldnt we deduct working capital if accounts receivable increased? Confused on this one…