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# Question of the Week - Financial Reporting

IllinoisPosts: 68 Sr Associate
edited May 2014
Given the following data, determine the cash flow from operations (All figures are in \$m):

Sales = 2,100
Increase in inventory = 200
Depreciation = 125
Increase in accounts receivable = 75
Decrease in accounts payable = 70
After tax profit margin = 35%
Gain on sale of machinery = 30

## Question of the Week - Financial Reporting 37 votes

\$515m
37%
\$545m
13%
\$485m
48%

• Posts: 15 Sr Associate
\$485m
Hope that's correct!
I made Net Income=0.35* Sales and calculated CFO via indirect method
\$515m
\$515, the gain on the machinery sale would go into CFI right?
• PittsburghPosts: 1 Associate
\$485m
I voted 485 but now I think 515 is correct per Alex.
• Posts: 15 Sr Associate
\$485m
Ok,
Let's work this out.

Net income = Sales*0,35=735
-200(Increase in Inventory)
+125(Depreciation which is a Non Cash Expense)
-75(Increase in accounts receivables)
-70(Increase in accounts payable)
-30 (Gain on sale which is a Cash Flow from Investing)

We get CFO = 485\$
• IllinoisPosts: 68 Sr Associate
Net income = 2,100 * 35% = 735

Cash flow from operations = Net income + Depreciation (Non cash expense does not incur actual cash outflow) – Increase in inventory (increase in asset is a cash outflow) – Increase in accounts receivable (increase in asset is a cash outflow) – Decrease in accounts payable (decrease in liability is a cash outflow) – Gain on sale of machinery (using the indirect method non-cash income statement items must be adjusted for).

Therefore, cash flow from operations = 735 + 125 – 200 – 75 – 70 – 30 = \$485m
• Phoenix, AZPosts: 9 Sr Associate
edited May 2014
\$485m
Indirect method
Net Income -> Adjustments -> CFO.
Since, Net Income includes any CFF and CFI, they need to be adjusted as well to get CFO.
Therefore, subtract the gain on sale of land as CFI.
You're right that it's CFI Alex, but it still needs to be subtracted...

so 485 is correct.

Any holes in my thinking?
• ItalyPosts: 1 Associate
\$485m
joe240 you're right ;)
• St. Louis, MOPosts: 72 Sr Associate
\$515m
Woo! I got it right.

• United StatesPosts: 1 Associate
\$515m
Answer is A, the gain on sale of equipment is already picked up in the calculation of after tax profit margin. This is not a CFI item.