CFAI Mock Exam PM Session Q49. (Computation of CFO) accounting, principles, statements, following

MythosHF

Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
The following information is from a company’s 2008 financial statements ($ millions):
Balances as of the year ended 31 December 2008 2007
Retained earnings 140 120
Accounts receivable 43 38
Inventory 48 45
Accounts payable 29 36
In 2008 the company declared and paid cash dividends of $5 million and recorded
depreciation expense in the amount of $25 million. The company’s 2008 cash
flow from operations ($ millions) is closest to:
A. 25.
B. 30.
C. 35.

stalkey

Answer is C.
20+5 (dividends paid) +25537=35
Isn’t Dividends Paid categorised under CFF? Why is this included in the computation of CFO?

WarrenB1

This question is also in the CFAi text. With CFO questions, they’re often asking for you to calculate it using either the direct or indirect method, so when you see a question telling you to calculate CFO, prep your mind that a direct or indirect preparation question is probably what they’re looking for. Then you can pretty easily tell with the info at hand what they want. In this case, they’re looking for the CFO prepared using the indirect method (you can tell with the data they provide). Whenever you’re using the indirect method, you ALWAYS start with net income. So to arrive at net income, you take current year retained earnings plus dividends paid (NI  div = RE). Then you work through the rest of the problem (add back depreciation, etc.).

random_walker47

Should it be like as follow:
net income=25
Plus dep=25
minus ch.rec =5
minus ch.inv=3
plus ch.pay=7
CFO = 49
what about this?

thommo77

C
NI= Ending Retained earnings  Begining Retained earnings + Dividend paid = 140 120 + 5 = 25
Dep + 25
Decrease in AR +5
Increase in Inventory 3
Decrease in AP 7
CFO = 25+25+537=35