Economic Pension Expense difference, describes, decrease, between, which

maratikus

Schweser Test 2PM: Question 96:

Employer Contributions = 5,000
Econ. Pension Expense = 4,250

Ignoring Taxes, which adjustment best describes the adjustments neccessary on the Cash Flow Statement?

a) Increase Operating Cash Flow 750, decrease Financning Cash Flow 750
b) Increase Operating Cash Flow 2084, decrease Financning Cash Flow 2084
c) Increase Operating Cash Flow 5000, decrease Financning Cash Flow 5000

Answer is....


a. The book said that the difference between the contributions and the actual expense can be viewed as a reduction in the overall pension obligation similar to an excess principal payment on a loan. Pension contributions are reported as operating activities in the cash flow statement, while principal payments are reported as financig activities. Thus, the adjustment involves INCREASING Operating Cash Flow by 750 and DECREASING Financing Cash Flow by 750.

My question - if there is excess contributions and they say its like making an excess principal payment, wouldn't that DECREASE operating cash flow when you pay the principal and INCREASE financing cash flow?

maybe I am just burned out and missing it....

SpyAli

For intensive purposes, the "excess principal payment" has to be taken out of financing cash flow since it is an outflow. However, you can't leave the CF statement like that since it won't equal your beginning and ending balance of cash, so you make an offsetting entry in cash flow from operations.

NO EXCUSES

scarecrow

Schweser Test 2PM: Question 96:

Employer Contributions = 5,000
Econ. Pension Expense = 4,250

Ignoring Taxes, which adjustment best describes the adjustments neccessary on the Cash Flow Statement?

a) Increase Operating Cash Flow 750, decrease Financning Cash Flow 750
b) Increase Operating Cash Flow 2084, decrease Financning Cash Flow 2084
c) Increase Operating Cash Flow 5000, decrease Financning Cash Flow 5000

Employer contributed 5000, Eco. pension expense=4250

So 750 $ more has been contributed by Employer - this is paying off loan on the Liability balance accumulated thus far.
so A)

When you pay off a loan - it is a CFF outflow. So CFF goes down.
If CFF goes down - CFO has to go up to balance.

CP