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30. Selected financial data for Janko, Inc, for 2012 follow. Assume the company pays no taxes. ($ in thousands) Operating income $800 Investment interest income 12 Dividends received on investments 4 Interest expense 40 Dividends paid 240 Capital expenditures 3,000 Increase in other long-term assets 30 Increase in long-term debt 120 Under U.S.GAAP, what is Janko’s cash outflow from investing activities for 2012? A. $3,030,000. B. $3,014,000. C. $2,970,000.

Ans: A. The cash outflow from investing activities is: Capital expenditures ($3,000,000) Increase in other long-term assets (30,000)   Total ($3,030,000) Note. Under U.S.GAAP, interest received and paid and dividends received are reported in operating activities.

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31. A company has the following changes and cash flows for 2012. Net income $700,000 Depreciation 100,000 Capital expenditures 1,000,000 Dividends declared 200,000 Dividend paid 180,000 Common stock issuance 300,000 Long-term debt issued 200,000 Interest paid 100,000 Under U.S.GAAP, what was its cash flow from financing activities in 2012? A. $220,000. B. $300,000. C. $320,000.

Ans: C. Cash from financing activities: Increase in long-term debt $200,000 Increase in common stock 300,000 Dividends paid (180,000)   Total $320,000

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32. Which of the items below are included in the calculation of both free cash flow to the firm (FCFF) and free cash flow to equity (FCFE) if you start with CFO? A. Interest paid. B. Net borrowing. C. Capital expenditures.

Ans: C. FCFF and FCFE are both calculated net of capital expenditures (FCInv) as indicated in the following formulas: FCFF = CFO + INT (1-t) – FCInv FCFE = CFO – FCInv ±Net borrowing A is incorrect. Interest payments are reflected in the calculation of FCFE as they are already reflected in CFO (under U.S.GAAP). However, the after-tax cost of interest is added back to CFO when calculating FCFF. Note: capital expenditures are subtracted in calculating FCFF and FCFE, however, dividends paid are not subtracted when calculating either FCFF or FCFE. B is incorrect. Net borrowing is an addition in arriving at FCFE, but is not included in the FCFF calculation.

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33. Included below are several financial line item excerpts from the 2012 financial statements of a company reporting under IFRS: Income statement items($000) Net sales $4,765 Operating costs 2,600 Depreciation & amortization 325 Loss on sale of assets 10 Equity in earnings of affiliates 52 Net income 895 Balance sheet related activity ($000) Decrease in accounts receivable 60 Increase in accounts payable 23 Dividends declared 18 The company’s cash flow from operations for 2012 was closest to ($000): A. $1,220. B. $1,261. C. $1,313.

Ans: B. The answer is derived based on the following indirect method formula calculation:   Net income $895 +depreciation & amortization 325 + loss on sale of assets 10 -equity in earnings of affiliates (52) + decrease in accounts receivable 60 + increase in accounts payable 23 cash flow from operations $1,261

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34. How would cash flows from operating activities (CFO), investing activities (CFI), and financing activities (CFF) under U.S.GAAP and IFRS be affected by interest received on investment? A. Under U.S.GAAP CFO increases and Under IFRS CFO increases. B. Under U.S.GAAP CFO increases and Under IFRS CFO or CFI increases. C. Under U.S.GAAP CFO or CFI increases and Under IFRS CFO increases.

And: B. Under U.S.GAAP, interest received is included in CFO. Under IAS GAAP, it can be classified as either CFO or CFI. Reference: question 3.

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35. The following information is from a company’s 2012 financial statements ($ millions): Balances as of the year ended 31 December 2012 2011 Retained earnings 140 120 Accounts receivable 43 38 Inventory 48 45 Accounts payable 29 36 The company declared and paid cash dividends of $5 million in 2012 and recorded depreciation expense in the amount of $25 million for 2012. Under U.S.GAAP, the company’s 2012 cash flow from operations ($ million) was closest to: A. 25. B. 30. C. 35.

Ans: C. The change in retained earnings is $20 and dividends are paid from retained earnings. 2012 net income would equal the change in retained earnings plus dividends paid during 2012. Depreciation expense would be added to net income and the changes in balance sheet account would also be considered to determine cash flow from operations. Retained earnings $20 +depreciation 25 + dividends 5 -increase in accounts receivable (5) - increase in inventory (3) -decrease in accounts payable (7) cash flow from operations $35

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36. On a cash flow statement prepared using the indirect method, which of the following would most likely increases the cash from investing activities? A. Sale of a long-term receivable. B. Sale of held-for-trading securities. C. Securitization of accounts receivable.

Ans: A. The sale of a long-term receivable would increase cash from investing activities; the other two activities mentioned are operating activities.

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37. If a company chooses to capitalize an expenditure related to capital assets instead of expensing it, ignoring taxes, the company will most likely report: A. a lower cash flow per share in that period. B. a higher earnings per share in future periods. C. the same free cash flow to the firm in that period.

Ans: C. Example: Capitalizing delivery cost as opposed to expensing it. FCFF=CFO + interest × (1– t) – capital expenditures If capitalized, the amount capitalized increases capital expenditures and is recorded as a cash outflow from investing activities. The CFO will be higher by amount capitalized, i.e., the amount not expensed. Since capital expenditures and CFO increase by the same amount, FCFF is unchanged. A is incorrect. Since CFO would be higher, cash flow per share in that period would be higher. B is incorrect. Capitalizing an expenditure related to capital assets will lead to an increase in the depreciation expense in future period. So the EPS in future period will be lower since net income will be lower.

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38. A company recorded the following events in 2012: $’000 Purchase of securities for trading purposes 240 Proceeds from the sale of trading securities 300 Proceeds from issuance of bonds 500 Purchase of 30% of the shares of an affiliated company 275 On the 2012 statement of cash flows, the company’s cash flow from investing activities (in ‘000) is closest to: A. -$275. B. -$215. C. $285.

Ans: A. Only the cash flows for the purchase of the shares in an affiliated company are cash from investing activities; therefore the net amount is -$275,000. Cash flows from trading securities are operating activities.

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39. Selected information for a company is provided below. $millions Sales 4,800 COGS 2,880 Purchases 2,940 Average receivables 625 Average inventory 710 Average payables 145 The company’s cash conversion cycle (in days) is closest to: A. 84. B. 120. C. 138.

Ans: B. Cash conversion cycle = Days sales outstanding + Days of inventory on hand – Days of payables AR days in sales (DSO) Inventory days on hand (DHO) AP days in payables Turnover 4,800/625 2,880/710 2,940/145 =7.68times =4.06times =20.3times In days 365/7.68 365/4.06 365/20.3 =48days =90days =18days Cash conversion cycle = DSO + DOH – Days in Payables = 48 + 90 – 18 = 120 days