CFA Level I · CFA Level I Exam · Analyzing Statements of Cash Flows I
A company using the indirect method reports net income of 400, depreciation of 80, a gain on sale of equipment of 30, an increase in inventory of 50, and an increase in accounts payable of 20. Cash flow from operating activities is closest to:
Operating cash flow is about 420. Start with net income of 400, add back depreciation of 80, subtract the 30 gain because the proceeds belong in investing, subtract the 50 inventory increase, and add the 20 payables increase.
- A340
- B420Correct
- C480
Explanation
400 + 80 - 30 (gain removed, belongs in investing) - 50 + 20 = 420. Failing to subtract the gain gives 450-ish errors; ignoring working capital gives 450. 480 arises from adding the gain and ignoring signs of working capital.
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