Indirect Method CFO Flashcards
Challenge Questions
XYZ Corporation reported a net income of $50,000 for the year. During the year, XYZ recorded depreciation of $10,000, an impairment loss on equipment of $5,000, and a gain on the sale of land of $8,000. Accounts receivable increased by $6,000, and accounts payable decreased by $2,000. What is the CFO using the indirect method?
A) $49,000
B) $45,000
C) $51,000
D) $39,000
Answer Explanation:
Correct Answer: A) $49,000
Calculation:
Start with net income: $50,000.
Add back noncash charges:
Depreciation: +$10,000.
Impairment loss: +$5,000.
Subtract non-operating items:
Gain on sale of land: -$8,000.
Adjust for working capital changes:
Increase in accounts receivable: -$6,000.
Decrease in accounts payable: -$2,000.
CFO = $50,000 + $10,000 + $5,000 - $8,000 - $6,000 - $2,000 = $49,000.
Option B fails to correctly adjust for all changes.
Option C incorrectly handles the gain on asset disposal.
Option D miscalculates the impact of changes in working capital.
ABC Inc. reported a net income of $120,000. The company’s depreciation expense was $15,000, and it recorded a loss of $4,000 on early debt retirement. Prepaid expenses increased by $3,000, and accrued liabilities decreased by $2,000. What is the cash flow from operating activities using the indirect method?
A) $134,000
B) $134,500
C) $136,000
D) $131,000
Answer Explanation:
Correct Answer: C) $136,000
Calculation:
Start with net income: $120,000.
Add back noncash charges:
Depreciation: +$15,000.
Loss on early debt retirement: +$4,000.
Adjust for changes in working capital:
Increase in prepaid expenses (operating asset): -$3,000.
Decrease in accrued liabilities (operating liability): -$2,000.
CFO = $120,000 + $15,000 + $4,000 - $3,000 - $2,000 = $136,000.
Option A incorrectly adds working capital adjustments.
Option B misses noncash adjustments.
Option D miscalculates prepaid expense impacts.
DEF Ltd. reported net income of $200,000. The company had a depreciation expense of $25,000 and an amortization expense of $10,000. It also recorded a gain of $15,000 on the sale of equipment. Inventory increased by $20,000, and accounts payable increased by $12,000. What is the cash flow from operations using the indirect method?
A) $212,000
B) $232,000
C) $222,000
D) $242,000
Answer Explanation:
Correct Answer: B) $232,000
Calculation:
Start with net income: $200,000.
Add back noncash charges:
Depreciation: +$25,000.
Amortization: +$10,000.
Subtract non-operating items:
Gain on sale of equipment: -$15,000.
Adjust for working capital changes:
Increase in inventory: -$20,000.
Increase in accounts payable: +$12,000.
CFO = $200,000 + $25,000 + $10,000 - $15,000 - $20,000 + $12,000 = $232,000.
Option A miscalculates noncash adjustments.
Option C does not adjust for all working capital changes.
Option D misapplies gains/losses on asset disposal.
GHI Corporation has a net income of $90,000. The company recorded depreciation expense of $18,000, amortization of bond premium of $5,000, and a loss on disposal of equipment of $3,000. Inventory decreased by $7,000, and wages payable increased by $4,000. What is the CFO using the indirect method?
A) $117,000
B) $119,000
C) $121,000
D) $123,000
Answer Explanation:
Correct Answer: B) $119,000
Calculation:
Start with net income: $90,000.
Add back noncash charges:
Depreciation: +$18,000.
Loss on disposal: +$3,000.
Subtract noncash income items:
Amortization of bond premium: -$5,000.
Adjust for working capital changes:
Decrease in inventory: +$7,000.
Increase in wages payable: +$4,000.
CFO = $90,000 + $18,000 + $3,000 - $5,000 + $7,000 + $4,000 = $119,000.
Option A miscalculates adjustments to working capital.
Option C incorrectly adds bond premium amortization.
Option D overstates the CFO due to errors in adjustments.
JKL Inc. reported net income of $150,000. The firm’s depreciation expense was $12,000, and it recognized an impairment loss of $7,000. Accounts receivable increased by $8,000, accounts payable decreased by $6,000, and inventory decreased by $5,000. Calculate the CFO using the indirect method.
A) $160,000
B) $155,000
C) $165,000
D) $167,000
Answer Explanation:
Correct Answer: C) $165,000
Calculation:
Start with net income: $150,000.
Add back noncash charges:
Depreciation: +$12,000.
Impairment loss: +$7,000.
Adjust for working capital changes:
Increase in accounts receivable: -$8,000.
Decrease in accounts payable: -$6,000.
Decrease in inventory: +$5,000.
CFO = $150,000 + $12,000 + $7,000 - $8,000 - $6,000 + $5,000 = $165,000.
Option A fails to correctly adjust for noncash charges.
Option B misses the proper handling of inventory changes.
Option D adds incorrectly for accounts receivable adjustments.
ABC Corporation reported net income of $45,000 for 20X7. Depreciation expense was $6,000, the gain on the sale of equipment was $12,000, and there was an increase in accounts receivable of $2,000. How much is the cash flow from operating activities (CFO) using the indirect method?
A) $37,000
B) $39,000
C) $47,000
D) $49,000
Answer Explanation:
Correct Answer: B) $39,000
Calculation:
Start with net income: $45,000.
Add back noncash charges:
Depreciation: +$6,000.
Subtract non-operating gains:
Gain on sale of equipment: -$12,000.
Adjust for working capital changes:
Increase in accounts receivable: -$2,000.
CFO = $45,000 + $6,000 - $12,000 - $2,000 = $39,000.
Option A miscalculates the impact of noncash charges.
Option C incorrectly handles the gain on asset disposal.
Option D overestimates the cash flow adjustments.
XYZ Ltd. had a net income of $52,000. During the year, the company reported depreciation of $8,000, an increase in deferred tax liability of $3,000, and a gain on the sale of land of $15,000. Accounts payable increased by $5,000, and wages payable decreased by $1,500. Calculate the CFO using the indirect method.
A) $51,500
B) $48,500
C) $54,500
D) $56,500
Answer Explanation:
Correct Answer: C) $54,500
Calculation:
Start with net income: $52,000.
Add back noncash charges:
Depreciation: +$8,000.
Increase in deferred tax liability: +$3,000.
Subtract noncash gains:
Gain on sale of land: -$15,000.
Adjust for working capital changes:
Increase in accounts payable: +$5,000.
Decrease in wages payable: -$1,500.
CFO = $52,000 + $8,000 + $3,000 - $15,000 + $5,000 - $1,500 = $54,500.
Option A miscalculates the effect of the deferred tax liability.
Option B fails to correctly adjust for changes in working capital.
Option D inaccurately adjusts for the gain on asset disposal.
DEF Corp. reported a net income of $60,000 for the year. The company had depreciation expenses of $9,000, a loss on the disposal of PP&E of $4,000, and an increase in accounts receivable of $3,000. Accounts payable increased by $2,500, and unearned revenue increased by $7,500. What is the CFO using the indirect method?
A) $80,000
B) $79,500
C) $78,000
D) $76,500
Answer Explanation:
Correct Answer: A) $80,000
Calculation:
Start with net income: $60,000.
Add back noncash charges:
Depreciation: +$9,000.
Loss on disposal of PP&E: +$4,000.
Adjust for working capital changes:
Increase in accounts receivable: -$3,000.
Increase in accounts payable: +$2,500.
Increase in unearned revenue: +$7,500.
CFO = $60,000 + $9,000 + $4,000 - $3,000 + $2,500 + $7,500 = $80,000.
Option B misses part of the noncash adjustments.
Option C miscalculates working capital changes.
Option D does not properly adjust for the loss on PP&E.
GHI Ltd. had a net income of $75,000. Depreciation was $10,000, impairment charges were $6,000, and there was a gain on the sale of land for $20,000. Inventory decreased by $4,000, accounts payable decreased by $3,500, and taxes payable increased by $2,000. What is the CFO using the indirect method?
A) $73,500
B) $73,000
C) $72,500
D) $74,500
Answer Explanation:
Correct Answer: D) $74,500
Calculation:
Start with net income: $75,000.
Add back noncash charges:
Depreciation: +$10,000.
Impairment charges: +$6,000.
Subtract noncash gains:
Gain on sale of land: -$20,000.
Adjust for working capital changes:
Decrease in inventory: +$4,000.
Decrease in accounts payable: -$3,500.
Increase in taxes payable: +$2,000.
CFO = $75,000 + $10,000 + $6,000 - $20,000 + $4,000 - $3,500 + $2,000 = $74,500.
Option A fails to correctly adjust for inventory changes.
Option B miscalculates the net effect of noncash gains.
Option C misses adjustments related to taxes payable.
JKL Inc. reported a net income of $80,000 for the year. During the period, JKL recorded $12,000 in depreciation, $5,000 in amortization of bond premiums, and a gain on the early retirement of debt of $10,000. Accounts receivable increased by $6,000, accounts payable increased by $4,000, and wages payable decreased by $1,000. Calculate the CFO using the indirect method.
A) $84,000
B) $85,000
C) $87,000
D) $83,000
Answer Explanation:
Correct Answer: B) $85,000
Calculation:
Start with net income: $80,000.
Add back noncash charges:
Depreciation: +$12,000.
Subtract noncash income:
Amortization of bond premiums: -$5,000.
Gain on early retirement of debt: -$10,000.
Adjust for working capital changes:
Increase in accounts receivable: -$6,000.
Increase in accounts payable: +$4,000.
Decrease in wages payable: -$1,000.
CFO = $80,000 + $12,000 - $5,000 - $10,000 - $6,000 + $4,000 - $1,000 = $85,000.
Option A incorrectly adjusts for the gain on early retirement.
Option C overstates the effects of working capital changes.
Option D miscalculates adjustments for noncash income.
