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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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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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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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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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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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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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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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29. Financial data for Woodview Corporation, a company that uses U.S.GAAP, are as follows: 2012 2011 Net income $40,000 $35,000 Dividends paid 15,000 13,000 Depreciation 25,000 20,000 Capital expenditures 60,000 50,000 Sale of equipment* 3,500 Net property and equipment 530,000 500,000 Long-term investments 10,000 12,000 Long-term debt 170,000 150,000 *Cost basis of equipment sold was $5,000. Using the information above, cash from operations and cash from financing activities reported on the company’s statement of cash flows for 2012 would be closest to? A. $66,500 for CFO and $5,000 for CFF. B. $65,000 for CFO and -$15,000 for CFF. C. $66,500 for CFO and -$15,000 for CFF.

Ans: A. Cash from operating activities: Net income $40,000 Depreciation 25,000 Loss on sale of equipment* 1,500 Total cash from operating activities $66,500 *Loss on sale of equipment Proceeds $3,500 Book value (5,000) Loss $(1,500) Cash from financing activities: Dividends paid (15,000) Increase in long-term debt 20,000 Total cash from financing activities 5,000

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28. an analyst gathered the following annual information ($millions) about a company that pays no dividends and has no debt: Net income 45.8 Depreciation 18.2 Loss on sale of equipment 1.6 Decrease in AR 4.2 Increase in inventories 3.4 Increase in AP 2.5 Capital expenditures 7.3 Proceeds from sale of stock 8.5 The company’s annual free cash flow to equity ($million) is closet to: A. 53.1. B. 58.4. C. 61.6.

Ans: C. FIFE=CFO-Capital expenditures+/-net borrowing CFO =Net income + depreciation + loss on sale of equipment +decrease in AR- increase in inventories + increase in AP =45.8+18.2+1.6+4.2-3.4+2.5 =$68.9million FCFE=68.9-7.3=$61.6.

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27. In 2012, a company reported net income of $130 million and cash flow from operations of $120 million. All else equal, the most likely explanation for the difference between net income and CFO in 2012 is that the company: A. tightened credit policies and increased collection efforts during the year. B. purchased new PP&E at the beginning of the year. C. increased raw material inventory in anticipation of increased sales at the end of the year.

Ans: C. The increase in inventory (working capital investment) would reduce CFO relative to net income. Reference: question 23. A is incorrect. This would increase CFO relative to net income. B is incorrect. This would decrease CFI.