[CPA CMA]

The following question is from Gleim CMA test bank, it can be classified as a FAR question as well.

Garnett Company’s year-end income statement shows the following:

Revenues

$5,000,000

Selling and general expenses (including depreciation expense of $200,000)

3,800,000

Interest expense

50,000

Gain on sale of equipment

40,000

Income tax expense (including deferred tax expense of $30,000)

320,000

Net income

$ 870,000

During the year, Garnett’s noncash current assets rose by $100,000, and current liabilities increased by $150,000. On its statement of cash flows, Garnett would report cash provided by operating activities of

A. $1,160,000

B. $1,190,000

C. $1,110,000

Answer (C) is correct.

Net operating cash flow may be determined by adjusting net income. Net income of $870,000 is decreased by the increase in current assets of $100,000, increased by the increase in current liabilities of $150,000, increased by depreciation expense of $200,000, decreased by the gain on sale of equipment of $40,000, and increased by the deferred tax liability. Thus, cash provided by operating activities would be $1,110,000.

D. $1,080,000

Everything else makes perfect sense but what about the $50,000 interest expense? Should it be classified as operating activity?

Master of Professional Accountancy (MPA) 12/17/2014

BEC 76 (10/3/14)
FAR 75 (10/24/14)
REG 83 (4/6/15)
AUD 75 (4/20/15)
Anticipated Licensure: August 2016

CMA part 1 passed (6/15/15)
CMA part 2 Passed (9/4/15)
Anticipated Licensure: August 2017

[Thrawn]

Interest expense on a long term debt is a financing activity.

BEC 87 Feb 14
REG 84 Apr 14
FAR 82 Nov 14
AUD 86 Feb 15

[Dantrick]

Can it be operating in IFRS? I can't remember.

[Thrawn]

Actually, now that I look at it again, the interest expense is an operating cash flow, but it is already accounted for because it is included in net income.

I was thinking IFRS which allows the interest expense to be either an operating or financing cash flow depending on the treatment of other similar items and the nature of the debt.

BEC 87 Feb 14
REG 84 Apr 14
FAR 82 Nov 14
AUD 86 Feb 15

[CPA CMA]

Thanks Thrawn! I missed that, it makes sense now!

Master of Professional Accountancy (MPA) 12/17/2014

BEC 76 (10/3/14)
FAR 75 (10/24/14)
REG 83 (4/6/15)
AUD 75 (4/20/15)
Anticipated Licensure: August 2016

CMA part 1 passed (6/15/15)
CMA part 2 Passed (9/4/15)
Anticipated Licensure: August 2017

[SponsoredByDunkinDonuts]

Interest expense is an operating cash flow unless the portion that is considered a repayment of principal, which would be financing. However, you only have the cash flows from interest expense for operating activities when you are using the Direct Method. Because this question gives you Net Income you are using the Indirect method to find the cash flows from operating. In that case, as @Thrawn said the expense was already deducted in the calculation of Net Income. So it's a distractor in this case.

AUD- 99 (11/26/2014)
BEC- 81 (1/12/2015)
REG- 85 (2/28/2015)
FAR- ?? (5/18/2015)

[Dantrick]

Good explanations everyone.

[Author]

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