Question 1

Orion Corp. is preparing its Statement of Cash Flows for the year ended December 31, Year 1, using the indirect method. The following information is available:

- Net Income: $450,000
- Depreciation Expense: $60,000
- Amortization of Bond Discount: $4,000
- Gain on Sale of Equipment: $12,000
- Equity in Earnings of Investee (Net of $10,000 dividends received): $25,000
- Decrease in Accounts Receivable: $15,000
- Increase in Inventory: $22,000
- Decrease in Accounts Payable: $8,000

What is the net cash provided by operating activities?

Accepted Answer

Start with Net Income. Add non-cash expenses (depreciation, amortization). Subtract non-cash gains (gain on sale). Adjust for equity method: subtract the equity earnings reported in NI, add back dividends received (or subtract the net undistributed earnings). Adjust for changes in working capital: Current Assets (inverse relationship), Current Liabilities (direct relationship).

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Adding the gain on sale instead of subtracting; mishandling the equity method adjustment (forgetting to remove the non-cash earnings); reversing the direction of working capital adjustments.

How to approach this question

Full Answer

Common mistakes

Practice the full CPA FAR Practice Exam 4

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