CMA Study Group

Define Cash Flow for operating & financing activities

  • 1.  Define Cash Flow for operating & financing activities

    Posted 04-15-2021 02:26 AM
    Hi every one, 

    I just started my journey to CMA. There is a question in the CMA support package 2021 that i do not understand how they come up with answer a. $100,000

    Question 24:

    CSO: 1A1d LOS: 1A1g 

    Larry Mitchell, Bailey Company's controller, is gathering data for the Statement of Cash Flows for the most recent year end. Mitchell is planning to use the indirect method to prepare this statement, and has made the following list of cash inflows for the period. 

    • Net income of $100,000. 

    • Securities purchased for investment purposes with an original cost of $100,000 sold for $125,000. 

    • Proceeds from the issuance of additional company stock totaling $10,000. 

    The correct amount to be shown as net cash provided by operating activities is 

    a. $100,000. 

    b. $135,000. 

    c. $225,000. 

    d. $235,000. 


    The classified "Securities purchased for investment purposes with an original cost of $100,000 sold for $125,000" as financing activity. 


    I understood that cash proceeds from sale of securities is INFLOW to net income --> this is financing activity. 


    gain on sale of securities which is $25,000 should be subtracted from net income --> this is under operating activity.  Therefore, the answer should be $75,000.


    Could you please help me to solve this question?


    Thank you and have a nice day,


    Best regards from Huong, Vietnam



  • 2.  RE: Define Cash Flow for operating & financing activities

    Posted 04-15-2021 02:13 PM

    I agree with your assessment.
    The $25,000 of gain on the sale would be included in Net Income and should be subtracted from operating activities and the $125,000 would be included as an Investing activity.

    It appears that their question/answer assumes that the gain was not included in net income, but I think that is an incorrect assumption.

    The $100,000 is the only reasonable answer on this list, but I still am certain this is incorrect.

    Thx.

    -mh



    ------------------------------
    Michael Henry
    Controller
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  • 3.  RE: Define Cash Flow for operating & financing activities

    Posted 04-15-2021 02:33 PM
    Hi Huong,

    You're correct. I believe the question is incorrectly stated by providing you the Net Income rather than saying something like "Collection from sales" or "Revenue from Operations". The $100k has to be the Revenue from sales to be the correct answer. Once an investment security is sold the gains/losses are recorded in Net Income. The unrealized gains/losses are recorded in the Other Comprehensive Income (OCI) line which comes after Net income (from what I remember).

    Which study material are you using? Maybe you can reach out to their customer service to provide you some insight.

    Good luck!

    ------------------------------
    Jobin Thomas
    Analyst
    Warwick PA
    United States
    ------------------------------



  • 4.  RE: Define Cash Flow for operating & financing activities

    Posted 04-17-2021 02:06 AM
    Hi,

    The company is the buyer so the gain is not included in its net income. Hence, no need to adjust the net income to arrive at net cash from operating activities.

    Regards,
    Dennis

    ------------------------------
    Dennis Azarcon
    Controller
    Dubai
    United Arab Emirates
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  • 5.  RE: Define Cash Flow for operating & financing activities

    Posted 04-24-2021 10:09 AM
    Hello Dennis,

    You answer got my attention.
    Can you please elaborate more?

    It would be really helpful.

    Have a nice day!


    ------------------------------
    Tejas Doke
    Accountant
    Dombivli MH
    India
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  • 6.  RE: Define Cash Flow for operating & financing activities

    Posted 04-25-2021 09:07 AM
    Hello Dennis

    The question is the to determine net cash from operating activities. You start with Net income $100000 the rest of known variables are not for operating activities. Therefore that is the correct answer - A - $100000

    ------------------------------
    Madalina Firu
    Accountant
    Kennesaw GA
    United States
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  • 7.  RE: Define Cash Flow for operating & financing activities

    Posted 04-26-2021 06:53 AM
    Hi Madalina,

    If the company is the seller of the securities, the gain should be adjusted to the net income to come up with the cash flows from operating activities. The gain on sale is non-cash that is included in the net income so needs to be deducted. you will then need to present in the cash flows from investing activities the full amount of the proceeds from sale.

    ------------------------------
    Dennis Azarcon
    Controller
    Dubai
    United Arab Emirates
    ------------------------------



  • 8.  RE: Define Cash Flow for operating & financing activities

    Posted 04-26-2021 06:48 AM
    Hi Tejas,

    in the problem, the Company is the one purchased the securities. hence, the original cost is irrelevant because the company will book the purchased securities at the purchase cost which the selling price of $125,000. The gain or loss from that sale will be recorded by the "Seller" and not by the company. Hence, the company's net income doesn't include the gain on sale so no need to adjust the company's net income to arrive at the cash flows from operating activities.

    ------------------------------
    Dennis Azarcon
    Controller
    Dubai
    United Arab Emirates
    ------------------------------