Some questions: 1. Doug Watson serves in a sales position at Sommerset Brokerage. As part of his employment, he is expected to entertain clients from time to time with dinners, golf outings, etc. Frequently at these client outings, Watson drinks excessively. One one occasion, after dropping off a client, Watson was cited by local police for public intoxication. When it comes to Standard 1A Knowledge of the Law, and Standard 1D Misconduct, Watson is in violation of: a) Both b) Neither c) Only one of these standards. 2. Kimberwick Technologies reported the following info for the year ending Dec 31: Net sales - 50,000 Cash expenses: 4250 Cash Inputs: 17,000 Cash Taxes: 7,000 Increase in receivables: 500 Depreciation Expense: 1,000 What is the CFO? a) 21, 250 b) 21, 750 c) 22, 250 Answers in a bit
C B
B C
c c
C and a
Answers are B, C. For the first question, how is frequently being excessively drunk when meeting with clients NOT misconduct? And how is doing this behavior thus NOT a violation of “Knowledge of the Law”? For the second question, why is the depreciation expense (1000) being added? Isn’t it ignored when doing the CFO through the direct method? Here are two more tricksters: Which of the following is least likely included in the CFA Code of Ethics? CFAI members must: a) place their clients interests before their employers interests. b) strive to maintain and improve the competence of others in the profession c) use reasonable care and exercise professional judgment. If a company purchases new equipment for $100,000, pays 10,000 for shipping, and pays $5,000 to have it installed in their plant, what is the book value of the equipment? a) 115,000 b) 100,000 c) 110,000
I agree with you on the first one in your first post. Misconduct and Knowledge of the Law. Off the top of my head: A A
The key with the first ethics I believe is that he dropped off the client so that removed the situation from the course of his employment (for the misconduct element). Also, when you’re outside of work the only crimes they (CFA) are sticklers for are those that involved fraud, stealing, lying etc. As for the “knowledge of the law” elemen,t the CFAI doesn’t take it to that degree. He certainly is aware that driving drunk etc is against the law but the same argument could be made for a traffic violation. The knowledge of the law questions usually arise when a regulation has changed relating to a member’s work and the member does not act accordingly out of ignorance. Second ethics Q is: A Be sure to notice when the question addresses Code of Ethics v. Standards of Professional Conduct.
HighestLearning Wrote: ------------------------------------------------------- > The key with the first ethics I believe is that he > dropped off the client so that removed the > situation from the course of his employment (for > the misconduct element). The question states that this guy drinks excessively WHILE meeting with clients. NOT after. So how is his drinking not affecting his job? It just so happened that he got the DUI after dropping off a client, but that’s not the only time he drinks. Drinking “excessively” while on the job is clear misconduct, isn’t it? > > Second ethics Q is: A > > Be sure to notice when the question addresses Code > of Ethics v. Standards of Professional Conduct. The COE DOES include A though.
Can someone please explain why Q2 you would add back depreciation and what is cash inputs?
net income= sales- expense-depreciation-tax = 50000-4250-1000-7000 =37750 now reconcile it back to obtain CFO net income+depreciation-increase in cash(cash inputs) -increase in recievables 37750 +1000-17000-500 =22250
^ Yeah, but you are using the indirect method. If one uses the direct method, given the same list of expenses, you should have the same result. But under the direct method you get (A) instead of ©. Depreciation expense is being added back to the CFO under the direct method when, according to the book, it shouldn’t be.
thanks gauri, got it. I was confused on the cash inputs. Brafique- he’s using the indirect method here by getting to NI first and then adding back the depreciation from NI.
^ Yeah, I understand that, but direct method and indirect method should both equal the same thing. Here, they don’t. I’m just trying to understand what I’m missing.
Please can anyone explain why I’m getting the wrong answer with the direct method??
let me try to explain : Net sales - 50,000 Cash expenses: 4250 Cash Inputs: 17,000 Cash Taxes: 7,000 Increase in receivables: 500 Depreciation Expense: 1,000 from the direct method : 50000 -4250-17000-7000+500 = 22250 now tell me where did I use depreciation to get the above answer??? brafique Wrote: ------------------------------------------------------- > Please can anyone explain why I’m getting the > wrong answer with the direct method??
^ Why are you adding the increase in receivables, shouldn’t it be subtracted?
gauri Wrote: ------------------------------------------------------- > let me try to explain : > > Net sales - 50,000 > Cash expenses: 4250 > Cash Inputs: 17,000 > Cash Taxes: 7,000 > Increase in receivables: 500 > Depreciation Expense: 1,000 > > > from the direct method : > 50000 -4250-17000-7000+500 = 22250 > > now tell me where did I use depreciation to get > the above answer??? > You need to subtract the increase in AR and add back depreciation expense. Remember you subtract increases in asset accounts and add decreases.
^ For the direct method, you subtract the increase in AR, but you DONT add back dep exp (you only add it back for indirect method). Think about it, with the INdirect method, you add back dep exp because it has been taken out of NI, and it is a noncash expense, so you must add it back to NI to get to CFO. With direct method, you start off with sales, so you don’t need to add back dep exp as it was never taken out in the first place. When I do that, the answer you get is A.
Why subtract cash inputs under indirect method? I thought cash inputs = inflow of cash, and should be added. No?