CFA Level I · CFA Level I Exam · Analyzing Statements of Cash Flows I
An analyst has only indirect-method statements and wants to estimate cash paid to suppliers. Which approach is most appropriate?
The analyst should start with cost of goods sold and adjust it for changes in inventory and accounts payable. This converts the accrual expense into cash paid to suppliers, which is how direct-method figures are derived from indirect-method data.
- AUse cost of goods sold adjusted for changes in inventory and payablesCorrect
- BUse net income adjusted for the depreciation charge only
- CUse cash from financing activities adjusted for dividends
Explanation
Cash paid to suppliers = COGS + increase in inventory - increase in payables (or the reverse for decreases). This converts accrual figures to cash using income statement and balance sheet data. The other options use unrelated items.
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