CFA Level IFinancial Statement AnalysisEasy
A company reports net income of $200,000. During the year, depreciation expense was $30,000, accounts receivable increased by $10,000, inventory decreased by $5,000, and accounts payable decreased by $8,000. Using the indirect method, what is cash flow from operations?
- A$197,000
- B$217,000
- C$207,000
- D$227,000
Show answer & explanationAnswer & explanation
Correct answer: B. $217,000
CFO = Net income + Depreciation − Increase in AR + Decrease in inventory − Decrease in AP = 200,000 + 30,000 − 10,000 + 5,000 − 8,000 = $217,000.
Why the other options are wrong
- A. Incorrect — omits the depreciation addback correctly but miscombines other adjustments.
- C. Incorrect — understates by not fully adding depreciation net of AR increase.
- D. Incorrect — overstates by treating the AP decrease as an addition instead of a subtraction.
Indirect Method CFO
CFO is computed by starting with net income and adjusting for noncash items and changes in operating working capital accounts.
- Add back noncash expenses like depreciation
- Increase in operating asset = cash outflow (subtract)
- Decrease in operating liability = cash outflow (subtract)
Memory trick: Assets up = cash down; Liabilities down = cash down