Student Question
“I am going over section A tests… I thought Interest Income and Dividend Income were included in CFO [Cash Flow from Operating Activities]…..the answer for this question says so, but when I get to question 15, it was not included in the CFO….Please clear the confusion.” – Steven.
MCQ – Interest & Dividend Income
The following information is extracted from the financial statements of BrentPage.
Net income $25,000
Depreciation on equipment 2,000
Dividend income 3,500
Interest income 3,000
Increase in current assets 5,400
Increase in current liabilities 500
Loans granted to subsidiaries 12,000
Assuming the company follows U.S. GAAP, calculate the cash flow from operating activities.
1. $32,900
2. $10,100
3. $28,600
4. $22,100 (Correct Answer)
Correct answer: (4) The correct answer is $22,100. CFO = Net income + Depreciation − Increase in current assets + Increase in current liabilities = $25,000 + $2,000 − $5,400 + $500 = $22,100
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Illustration Of Interest & Dividend Income
Interest received and dividends received from debt and equity investments are considered as cash from operating activities.
However, interest income and dividend income were not added because it is already a component of Net Income.
To illustrate, please see below:
| Operating Income | 31,962 | ||
| Add: Other Income |
6,500
|
||
| Interest Income | 3,000 | ||
| Dividend Income | 3,500 | ||
| Net Income Before Tax | 38,462 | ||
| Income Tax Expense (Assuming a Tax Rate of 35%) | -13,462 | ||
| Net Income | 25,000 | ||
| Depreciation on equipment | 2,000 | ||
| Add (Less) |
-4,900
|
||
| Increase in current assets | -5,400 | ||
| Increase in current liabilities | 500 | ||
| Net Cash Inflow from Operating Activities (CFO) | 22,100 | ||
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Below you’ll find an example of a mini-lesson that helped my student, Steven, understand when interest income and dividend income are included in CFO (Cash Flow from Operating Activities)..
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2 Comments on “CMA Part-One Mini-Lesson: When Is Interest Income and Dividend Income Included in CFO (Cash Flow from Operating Activities)?”
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