CFA Pension Reading 22 Question #9 understand, financing, question, benefit, between

Wasteoftime

hi,
I don’t understand how to do this question at all. The $1,050 Net periodic benefit Cost needs to be reconciled between Net Income and CFO.
First of all, why is the $1,050 a non-cash expense?
Second, I understand that the excess contribution needs to be a financing CF instead of an operating cash flow, but I thought that was the excess over the ECONOMIC pension cost, not the stated pension cost per the P/L statement.
Please explain this reconciliation between net income and CFO.
Thanks

Windjam

it is non-cash because it is shown on income statement, but truly not paid. it is an accounting only entry.
the only true expense relates to Company contrib to the plan. which is 526$.
So 1050 is added back, 526 is removed - so your net adjustment is 524$ (1050-526).
When you start with NI and go with the Indirect method - you would going by the company’s financial statements start with 1050 and go on…
but the analyst adjustment relates to recognizing that the 1050 should not be the starting point but 526 should be the starting point. (which is an adjustment of 524).

DarienHacker

1. the $1,050 Net periodic benefit Cost is not paid to employees. it is added to the company’s liabilities, but it’s not yet paid (that’s why we also need to record interest cost). “non-cash charge” means you didn’t pay, but your obligation increases. so it will not appear in CFS but only B/S.
2. the excess which should be adjusted from CFO to CFF is employer comtribution minus economic pension expense…hope I don’t memorized it wrong…
NI and CFO - the relationship is explained in Lv1 curriculum as CPK123 stated. In fact we just use 2 Balance sheets and 1 Income statement to calc a cash flow statement.

WarrenB1

coshair, I think you got a little confused. Look below for the right explanation of reclassification from CFF to CFO and vice versa.
Employer Contribution  Economic Pension Expense – you are paying back principal on a loan - which is a CFF outflow. So CFO increase, CFF reduce.
Employer contribution you are taking more loan. So CFF Inflow. CFO Reduce, CFF increase.

johnnyBuz

Yes. I know your meaning, if contribution is less than EPE, it is taken as a financing activitity to “borrow” money. ~