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Basic Question 7 of 11
Lakeview Company owns 30% of River Company and accounts for this investment using the equity method. Lakeview's net income for the year is $20 million and River's net income for the same period is $8 million. River paid no dividends during the year. If Lakeview uses the indirect method for its cash flow statement, what amount will it add to or subtract from its accrual-based net income in its statement of cash flows related to this investment?
B. Add $8 million
C. Subtract $2.4 million
A. Add $2.4 million
B. Add $8 million
C. Subtract $2.4 million
User Contributed Comments 9
| User | Comment |
|---|---|
| surob | so as it is a gain from investment, it should be accounted for in CFI. Right? |
| raphdamico | because no dividends have been paid, the $8m net income of the subsidiary doesn't actually make it directly to the parent as cash. |
| ridone | Since dividends are not paid they will not appear in the income statement in the first place? |
| surjoy | If dividends are received by Lakeview, then it will be an inflow of CFO. |
| YOUCANDOIT | great question! |
| Ifi2703 | Lakeview has a claim to that amount of net income but has not received any portion of that profit in cash (dividends) so it shouldn't be included in their cash flow calculations. |
| johntan1979 | NOTE: Add/subtract to or from NET INCOME, not cash flow |
| ascruggs92 | Equity method - if company owns a significant portion of another entity, it recognizes net income from the entity proportionate to their ownership regardless of whether cash is received or not. In this case, $8M x 30% = $2.4M is recognized as net income. Dividends reduce the amount held in the investment account |
| choas69 | InDirecet Method (simplified) : add non-cash charges (depreciation) deduct non-cash income (revaluation) add non-cfo activities charges (interest paid) deduct non-cfo activites income (dividend received) W.C adjustments: add: decrease in CA less: increase in CA add: increase in CL less: decreases in CL Net Cash |
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Learning Outcome Statements
describe the steps in the preparation of direct and indirect cash flow statements, including how cash flows can be computed using income statement and balance sheet data
CFA® 2024 Level I Curriculum, Volume 2, Module 4.