Analysis of Cash Flow and Basis – Series 7 Exam

Analysis of Cash Flow and Basis – Series 7 Exam
📘 FINRA Exam Mastery – Understand the Numbers. Pass with Confidence.
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💵 Why Cash Flow and Basis Analysis Matters
In the Series 7 exam, you’ll be tested on how to evaluate investment income, return of capital, taxation, and profitability—especially for bonds and real estate limited partnerships (DPPs). Understanding cash flow and basis is essential for answering suitability and tax scenario questions.

📊 1. What Is Cash Flow?

Cash flow = Net Income + Depreciation + Amortization
This is especially relevant in analyzing Direct Participation Programs (DPPs) and real estate investments.

✅ Key Points:

• Depreciation is a non-cash expense — it reduces taxable income without reducing actual cash.
• A program may show a net loss on paper but still generate positive cash flow.

📘 Expect exam questions like:

“An investor receives regular income despite reporting a loss on their K-1. What explains this?”
✔️ Answer: Depreciation deductions leading to positive cash flow.

📉 2. What Is Basis?

Basis represents the investor’s cost in the security or investment, used to calculate capital gains/losses when sold.

✅ Types of Basis:

• Initial basis – amount originally invested
• Adjusted basis – reflects additions/subtractions like reinvested dividends or return of capital
• Cost basis in stocks and bonds – determines taxable gain or loss upon sale

🔁 Adjustments That Affect Basis:

• Increases: Additional contributions, reinvested dividends
• Decreases: Return of capital, depreciation deductions, passive losses

📘 Sample exam question:

“An investor buys into a limited partnership for $50,000 and receives a $5,000 return of capital. What is their adjusted basis?”
✔️ Answer: $45,000

🔍 3. Why This Matters on the Series 7

You must apply basis and cash flow concepts to:

• Evaluate suitability of DPPs or real estate investments
• Determine tax implications for clients
• Understand how losses affect basis and deductibility

🔁 Passive losses cannot exceed basis — that’s a frequently tested rule!

📘 Series 7 Test-Taking Tips:

✅ Know that positive cash flow does not mean taxable income
✅ Remember that depreciation reduces basis
✅ Be able to calculate gain or loss using adjusted basis
✅ Understand how return of capital affects cost basis

📘 Learn It Visually with FINRA Exam Mastery
We break down basis and cash flow with:

• Real-life tax scenarios
• Step-by-step calculations
• Flashcards and cheat sheets
• Practice questions with explanations

👉 Start mastering this section at: https://finra-exam-mastery.com

🎯 Understand the flow. Track the basis. Pass with precision.