CMA Part-One Mini-Lesson: When Is Interest Income and Dividend Income Included in CFO (Cash Flow from Operating Activities)?

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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)..

If you don’t have materials yet and would like to study with me, I recommend my Complete Course.

Until our next lesson,

Nathan Liao Signature

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