CFA 27: Quiz 6
Purple Fleur S.A., a retailer of floral products, reported cost of goods sold for the year of $75 million. Total assets increased by $55 million, but inventory declined by $6 million. Total liabilities increased by $45 million, and accounts payable increased by $2 million. The cash paid by the company to its suppliers is most likely closest to: $67 million. $79 million. $83 million.
A is correct. Cost of goods sold of $75 million less the decrease in inventory of $6 million equals purchases from suppliers of $69 million. The increase in accounts payable of $2 million means that the company paid $67 million in cash ($69 million minus $2 million).
Red Road Company, a consulting company, reported total revenues of $100 million, total expenses of $80 million, and net income of $20 million in the most recent year. If accounts receivable increased by $10 million, how much cash did the company receive from customers? $90 million. $100 million. $110 million.
A is correct. Revenues of $100 million minus the increase in accounts receivable of $10 million equal $90 million cash received from customers. The increase in accounts receivable means that the company received less in cash than it reported as revenue.
Silverago Incorporated, an international metals company, reported a loss on the sale of equipment of $2 million in 2010. In addition, the company's income statement shows depreciation expense of $8 million and the cash flow statement shows capital expenditure of $10 million, all of which was for the purchase of new equipment. Using the following information from the comparative balance sheets, how much cash did the company receive from the equipment sale? Balance Sheet Item 12/31/2009 12/31/2010 Change Equipment $100 million $105 million $5 million Accumulated depreciation—equipment $40 million $46 million $6 million $1 million. $2 million. $3 million.
A is correct. Selling price (cash inflow) minus book value equals gain or loss on sale; therefore, gain or loss on sale plus book value equals selling price (cash inflow). The amount of loss is given—$2 million. To calculate the book value of the equipment sold, find the historical cost of the equipment and the accumulated depreciation on the equipment. Beginning balance of equipment of $100 million plus equipment purchased of $10 million minus ending balance of equipment of $105 million equals the historical cost of equipment sold, or $5 million. Beginning accumulated depreciation of $40 million plus depreciation expense for the year of $8 million minus ending balance of accumulated depreciation of $46 million equals accumulated depreciation on the equipment sold, or $2 million. Therefore, the book value of the equipment sold was $5 million minus $2 million, or $3 million. Because the loss on the sale of equipment was $2 million, the amount of cash received must have been $1 million.
Jaderong Plinkett Stores reported net income of $25 million. The company has no outstanding debt. Using the following information from the comparative balance sheets (in millions), what should the company report in the financing section of the statement of cash flows in 2010? Balance Sheet Item 12/31/2009 12/31/2010 Change Common stock $100 $102 $2 Additional paid-in capital common stock $100 $140 $40 Retained earnings $100 $115 $15 Total stockholders' equity $300 $357 $57 Issuance of common stock of $42 million; dividends paid of $10 million. Issuance of common stock of $38 million; dividends paid of $10 million. Issuance of common stock of $42 million; dividends paid of $40 million.
A is correct. The increase of $42 million in common stock and additional paid-in capital indicates that the company issued stock during the year. The increase in retained earnings of $15 million indicates that the company paid $10 million in cash dividends during the year, determined as beginning retained earnings of $100 million plus net income of $25 million minus ending retained earnings of $115 million, which equals $10 million in cash dividends.
Which of the following components of the cash flow statement may be prepared under the indirect method under both IFRS and US GAAP? Operating. Investing. Financing.
A is correct. The operating section may be prepared under the indirect method. The other sections are always prepared under the direct method.
An analyst has calculated a ratio using as the numerator the sum of operating cash flow, interest, and taxes and as the denominator the amount of interest. What is this ratio, what does it measure, and what does it indicate? This ratio is an interest coverage ratio, measuring a company's ability to meet its interest obligations and indicating a company's solvency. This ratio is an effective tax ratio, measuring the amount of a company's operating cash flow used for taxes and indicating a company's efficiency in tax management. This ratio is an operating profitability ratio, measuring the operating cash flow generated accounting for taxes and interest and indicating a company's liquidity.
A is correct. This ratio is an interest coverage ratio, measuring a company's ability to meet its interest obligations and indicating a company's solvency. This coverage ratio is based on cash flow information; another common coverage ratio uses a measure based on the income statement (earnings before interest, taxes, depreciation, and amortisation).
Which of the following is most likely to appear in the operating section of a cash flow statement under the indirect method? Net income. Cash paid to suppliers. Cash received from customers.
A is correct. Under the indirect method, the operating section would begin with net income and adjust it to arrive at operating cash flow. The other two items would appear in the operating section under the direct method.
An analyst gathered the following information from a company's 2010 financial statements (in $ millions): Balances as of Year Ended 31 December 2009 2010 Retained earnings 120 145 Accounts receivable 38 43 Inventory 45 48 Accounts payable 36 29 In 2010, the company declared and paid cash dividends of $10 million and recorded depreciation expense in the amount of $25 million. The company considers dividends paid a financing activity. The company's 2010 cash flow from operations (in $ millions) was closest to 25. 45. 75.
B is correct. All dollar amounts are in millions. Net income (NI) for 2010 is $35. This amount is the increase in retained earnings, $25, plus the dividends paid, $10. Depreciation of $25 is added back to net income, and the increases in accounts receivable, $5, and in inventory, $3, are subtracted from net income because they are uses of cash. The decrease in accounts payable is also a use of cash and, therefore, a subtraction from net income. Thus, cash flow from operations is $25 + $10 + $25 - $5 - $3 - $7 = $45.
Which is an appropriate method of preparing a common-size cash flow statement? Show each item of revenue and expense as a percentage of net revenue. Show each line item on the cash flow statement as a percentage of net revenue. Show each line item on the cash flow statement as a percentage of total cash outflows.
B is correct. An appropriate method to prepare a common-size cash flow statement is to show each line item on the cash flow statement as a percentage of net revenue. An alternative way to prepare a statement of cash flows is to show each item of cash inflow as a percentage of total inflows and each item of cash outflows as a percentage of total outflows.
The sale of a building for cash would be classified as what type of activity on the cash flow statement? Operating. Investing. Financing.
B is correct. Purchases and sales of long-term assets are considered investing activities. Note that if the transaction had involved the exchange of a building for other than cash (for example, for another building, common stock of another company, or a long-term note receivable), it would have been considered a significant non-cash activity.
Which of the following is an appropriate method of computing free cash flow to the firm? Add operating cash flows to capital expenditures and deduct after-tax interest payments. Add operating cash flows to after-tax interest payments and deduct capital expenditures. Deduct both after-tax interest payments and capital expenditures from operating cash flows.
B is correct. Free cash flow to the firm can be computed as operating cash flows plus after-tax interest expense less capital expenditures.
The three major classifications of activities in a cash flow statement are: inflows, outflows, and net flows. operating, investing, and financing. revenues, expenses, and net income.
B is correct. Operating, investing, and financing are the three major classifications of activities in a cash flow statement. Revenues, expenses, and net income are elements of the income statement. Inflows, outflows, and net flows are items of information in the statement of cash flows.
Which of the following would be valid conclusions from an analysis of the cash flow statement for Telefónica Group presented in Exhibit 3? The primary use of cash is financing activities. The primary source of cash is operating activities. Telefónica classifies interest received as an operating activity.
B is correct. The primary source of cash is operating activities. The primary use of cash is investing activities. Interest received for Telefónica is classified as an investing activity.
Based on the following information for Star Inc., what are the total net adjustments that the company would make to net income in order to derive operating cash flow? Year Ended Income Statement Item 12/31/2010 Net income $20 million Depreciation $2 million Balance Sheet Item 12/31/2009 12/31/2010 Change Accounts receivable $25 million $22 million ($3 million) Inventory $10 million $14 million $4 million Accounts payable $8 million $13 million $5 million Add $2 million. Add $6 million. Subtract $6 million.
B is correct. To derive operating cash flow, the company would make the following adjustments to net income: Add depreciation (a non-cash expense) of $2 million; add the decrease in accounts receivable of $3 million; add the increase in accounts payable of $5 million; and subtract the increase in inventory of $4 million. Total additions would be $10 million, and total subtractions would be $4 million, which gives net additions of $6 million.
The first step in cash flow statement analysis should be to: evaluate consistency of cash flows. determine operating cash flow drivers. identify the major sources and uses of cash.
C is correct. An overall assessment of the major sources and uses of cash should be the first step in evaluating a cash flow statement.
White Flag, a women's clothing manufacturer, reported salaries expense of $20 million. The beginning balance of salaries payable was $3 million, and the ending balance of salaries payable was $1 million. How much cash did the company pay in salaries? $18 million. $21 million. $22 million.
C is correct. Beginning salaries payable of $3 million plus salaries expense of $20 million minus ending salaries payable of $1 million equals $22 million. Alternatively, the expense of $20 million plus the $2 million decrease in salaries payable equals $22 million.
An analyst gathered the following information from a company's 2010 financial statements (in $ millions): Year ended 31 December 2009 2010 Net sales 245.8 254.6 Cost of goods sold 168.3 175.9 Accounts receivable 73.2 68.3 Inventory 39.0 47.8 Accounts payable 20.3 22.9 Based only on the information above, the company's 2010 statement of cash flows in the direct format would include amounts (in $ millions) for cash received from customers and cash paid to suppliers, respectively, that are closest to: cash received from customers cash paid to suppliers A 249.7 169.7 B 259.5 174.5 C 259.5 182.1
C is correct. Cash received from customers = Sales + Decrease in accounts receivable = 254.6 + 4.9 = 259.5. Cash paid to suppliers = Cost of goods sold + Increase in inventory - Increase in accounts payable = 175.9 + 8.8 - 2.6 = 182.1.
Green Glory Corp., a garden supply wholesaler, reported cost of goods sold for the year of $80 million. Total assets increased by $55 million, including an increase of $5 million in inventory. Total liabilities increased by $45 million, including an increase of $2 million in accounts payable. The cash paid by the company to its suppliers is most likely closest to: $73 million. $77 million. $83 million.
C is correct. Cost of goods sold of $80 million plus the increase in inventory of $5 million equals purchases from suppliers of $85 million. The increase in accounts payable of $2 million means that the company paid $83 million in cash ($85 million minus $2 million) to its suppliers.
Interest paid is classified as an operating cash flow under: US GAAP but may be classified as either operating or investing cash flows under IFRS. IFRS but may be classified as either operating or investing cash flows under US GAAP. US GAAP but may be classified as either operating or financing cash flows under IFRS.
C is correct. Interest expense is always classified as an operating cash flow under US GAAP but may be classified as either an operating or financing cash flow under IFRS.
Golden Cumulus Corp., a commodities trading company, reported interest expense of $19 million and taxes of $6 million. Interest payable increased by $3 million, and taxes payable decreased by $4 million over the period. How much cash did the company pay for interest and taxes? $22 million for interest and $10 million for taxes. $16 million for interest and $2 million for taxes. $16 million for interest and $10 million for taxes.
C is correct. Interest expense of $19 million less the increase in interest payable of $3 million equals interest paid of $16 million. Tax expense of $6 million plus the decrease in taxes payable of $4 million equals taxes paid of $10 million.
A conversion of a face value $1 million convertible bond for $1 million of common stock would most likely be: reported as a $1 million investing cash inflow and outflow. reported as a $1 million financing cash outflow and inflow. reported as supplementary information to the cash flow statement.
C is correct. Non-cash transactions, if significant, are reported as supplementary information, not in the investing or financing sections of the cash flow statement.
Which of the following is an example of a financing activity on the cash flow statement under US GAAP? Payment of interest. Receipt of dividends. Payment of dividends.
C is correct. Payment of dividends is a financing activity under US GAAP. Payment of interest and receipt of dividends are included in operating cash flows under US GAAP. Note that IFRS allow companies to include receipt of interest and dividends as either operating or investing cash flows and to include payment of interest and dividends as either operating or financing cash flows.
Cash flows from taxes on income must be separately disclosed under: IFRS only. US GAAP only. both IFRS and US GAAP.
C is correct. Taxes on income are required to be separately disclosed under IFRS and US GAAP. The disclosure may be in the cash flow statement or elsewhere.
