CFA Level 1: Statement of Cash Flows | Change in Cash Calculation

Statement of Cash Flows: Change in Cash Calculation

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Question

The following information should be used according to the provisions of SFAS 95 (Statement of Cash flows) and using the following data.

Net Income $50,000 -

Provision for bad debts $2,000 -

Increase in Inventory $1,000 -

Increase in accounts payable $2,000

Purchase of new equipment $15,000

Sale of equipment for $10,000 gain $20,000

Depreciation expense $5,000 -

Repurchase of common stock $10,000

Payment of dividend $4,000 -

Interest payment $3,000 -

What is change in cash?

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Explanations

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A

$50,000 + (-$1,000 + $2,000 - $15,000 + $20,000 - $10,000 - $4,000 - $3,000)

To determine the change in cash using the provisions of SFAS 95 (Statement of Cash Flows), we need to classify each item as operating, investing, or financing activity and then calculate the net cash flow from each category.

Let's break down each item and classify it accordingly:

  1. Net Income: Net income is an operating activity because it represents the profit generated from the core operations of the business. Since it is already given as $50,000, we include it as an inflow of cash.

  2. Provision for bad debts: This is an operating activity and is classified as an expense. Since it reduces net income, we deduct the provision for bad debts of $2,000 from net income.

  3. Increase in Inventory: An increase in inventory is a use of cash because it indicates that more cash was spent to acquire additional inventory. We subtract the increase of $1,000 from net income.

  4. Increase in accounts payable: An increase in accounts payable is a source of cash because it represents an increase in the company's liabilities, allowing them to delay payment. We add the increase of $2,000 to net income.

  5. Purchase of new equipment: This is an investing activity and represents a use of cash. We subtract the purchase amount of $15,000 from net income.

  6. Sale of equipment for $10,000 gain: This is an investing activity and represents a source of cash. Since the equipment was sold for a gain, we add the gain of $10,000 to net income.

  7. Depreciation expense: Depreciation is a non-cash expense and does not affect the cash flow. We ignore it in the cash flow calculation.

  8. Repurchase of common stock: This is a financing activity and represents a use of cash. We subtract the repurchase amount of $10,000 from net income.

  9. Payment of dividend: Dividend payment is a financing activity and represents a use of cash. We subtract the dividend payment of $4,000 from net income.

  10. Interest payment: Interest payment is an operating activity and represents a use of cash. We subtract the interest payment of $3,000 from net income.

Now, let's calculate the change in cash:

Net Income: $50,000

  • Provision for bad debts: -$2,000
  • Increase in Inventory: -$1,000
  • Increase in accounts payable: +$2,000
  • Purchase of new equipment: -$15,000
  • Sale of equipment for $10,000 gain: +$10,000
  • Repurchase of common stock: -$10,000
  • Payment of dividend: -$4,000
  • Interest payment: -$3,000

Change in cash = $50,000 - $2,000 - $1,000 + $2,000 - $15,000 + $10,000 - $10,000 - $4,000 - $3,000

Change in cash = $27,000

Therefore, the change in cash is $27,000.

None of the answer choices provided match the calculated change in cash. It's possible that there is an error in the question or answer choices. Please double-check the information or contact the exam provider for clarification.

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