CMA Part-One Mini-Lesson: How did We Calculate the Cash Flow from Operating Activities (CFO)?

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Student Question

“Hello Nathan,

For the below, I’m confused how was the CFO calculated to be 700,000? There’s a step in the calculation that I’m missing??”

– Mohammad

MCQ

SUL Company’s cash balance increased by $400,000 during the current period. In examining the statement of cash flow, you see that the net cash flow from investing was ($2.3 million) and the net cash flow from financing was $2 million. Further investigation reveals that the firm has fixed charges of $600,000, interest expenses of $525,000, and taxes of $120,000.

What is the cash flow to fixed charges ratio?

A. 2.37

B. 1.24 (Correct Answer)

C. 4

D. 2.5

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LOS: Identify the major components and classifications of each statement.

Net Cash Flow = Cash Flow from Operations + Cash Flow from Investing + Cash Flow from Financing.

Here’s the formula:

Cash flow from Operating Activities xxx
Cash flow from Investing Activities xxx
Cash flow from Financing Activities xxx
Increase (Decrease) in Cash xxx

If we squeeze the formula above, we will arrive at the CFO of:

Increase (Decrease) in Cash 400,000
Less: Cash flow from Financing Activities (2,000,000) Deducted – net cash inflow
Less: Cash flow from Investing Activities 2,300,000 Added – net cash outflow
Cash flow from Operating Activities (CFO) 700,000

Therefore, the Cash Flow to Fixed Charges ratio will be:

Cash Flow to Fixed Charges = (Operating Cash Flow + Fixed Charges + Tax Payments)
Cash Flow to Fixed Charges = ($700,000 + $600,000 + $120,000) / $600,000
Cash Flow to Fixed Charges = $1,420,000 / $600,000
Cash Flow to Fixed Charges = 2.37

My Complete Course students pass the CMA exam at double the global pass rate of 35%. This is possible due to the personalized 1-on-1 coaching support they receive throughout their exam prep program.

Mohammad didn’t have any study materials before finding CMA Exam Academy so he opted for my Complete Course to gain access to the ultimate toolkit for the CMA exam preparation.

Until our next lesson,

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Nathan Liao

Hi, I’m Nathan Liao (aka the CMA Coach)! In the past 8 years, over 37,000 CMA candidates came knocking at my door seeking guidance. And just like them, I’m here to show you how you can pass the CMA exam on your first attempt without wasting money or time. Click here to learn more about me and the awesome team behind CMA Exam Academy.

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