Question 1

Madison Inc. reported the following for Year 1:
- Net income: $200,000
- Depreciation expense: $80,000
- Amortization of bond premium: $5,000
- Gain on sale of equipment: $15,000
- Increase in accounts receivable: $30,000
- Decrease in inventory: $20,000
- Increase in accounts payable: $25,000
- Decrease in accrued liabilities: $10,000

Using the indirect method, what is Madison Inc.'s cash flow from operating activities for Year 1?

Accepted Answer

Start with net income, add back non-cash expenses (depreciation), subtract non-cash income reductions (bond premium amortization), remove non-operating items (gain on sale), then adjust for working capital changes using the rule: increases in assets are uses of cash (subtract), decreases in assets are sources of cash (add), increases in liabilities are sources of cash (add), decreases in liabilities are uses of cash (subtract).

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Adding the gain on sale instead of subtracting it, incorrectly treating bond premium amortization as an addition, or misdirecting working capital changes

How to approach this question

Full Answer

Common mistakes

Practice the full CPA FAR Practice Exam 2

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