Chartered Financial Analyst (CFA) Practice Exam Level 2

Which of the following is true about Adjusted FFO?

1. It is always equal to net income

2. It adjusts net income for non-cash items

3. It focuses solely on operating income

4. It excludes all non-recurring expenses

The correct answer is: It adjusts net income for non-cash items

Adjusted Funds From Operations (Adjusted FFO) is a metric primarily used in real estate investment trusts (REITs) and similar entities to provide a clearer picture of cash flow available to investors. The statement that it adjusts net income for non-cash items is accurate because Adjusted FFO takes net income and adds back certain non-cash expenses, such as depreciation and amortization, as well as adjusts for gains or losses on sales of properties or other non-recurring items. This adjustment is crucial as it aims to give a more accurate reflection of the operational cash flow generated by the assets, recognizing that net income can be influenced by accounting choices rather than actual cash movements in the business. By focusing on these adjustments, investors can better assess sustainable cash flows that can be distributed to shareholders. The other statements do not accurately reflect the nature of Adjusted FFO. For example, it does not equate to net income since it is an adjusted measure that emphasizes cash flow. It is also not limited solely to operating income, nor does it exclude all non-recurring expenses, as it selectively adds back certain non-cash items and makes specific adjustments rather than performing a blanket exclusion of non-recurring expenses. Thus, the emphasis on adjustments for non