FlNANCIAF
STATEßIENT
, Appendix B
Solution Manual for Financial Statement Analysis & Valuation, 6th edition By Peter D. Easton
Computing and Analyzing
Cash Flows
Learning Objectives – Coverage by question
True/False Multiple Choice
LO1 – Describe the framework for the 1-9, 17,
1, 2, 5, 12-14, 18
statement of cash flows. 18, 20, 21, 26
LO2 – Determine and analyze net cash flows 4, 6, 8-11, 15 6-11, 19
from operating activities.
LO3 – Determine and analyze net cash flows 3, 14-16 17-19
from investing activities.
LO4 – Determine and analyze net cash flows 3, 13, 17-19 20-22
from financing activities.
LO5 – Examine and interpret cash flow
information.
LO6 – Compute and interpret ratios 20, 21 23-25
based on operating cash flows.
LO7 – Explain and construct a direct method 7 12-16
statement of cash flows (Appendix BB).
These questions are available to assign in
myBusinessCourse.
© Cambridge Business Publishers, 2021
B-1 Financial Statement Analysis & Valuation, 6th Edition
,Appendix B: Computing and Analyzing Cash Flows
True/False
Topic: Cash and Cash Equivalents
LO: 1
1. The statement of cash flows encompasses only a firm’s cash because cash equivalents
are really marketable securities, which are short-term investments.
Answer: False
Rationale: Cash equivalents may be marketable securities but because they have
very short maturities, they are treated like cash.
Topic: Sections in Statement of Cash Flows
LO: 1
2. The statement of cash flows
separates cash flows into operating,
nonoperating, and financing
categories.
Answer: False
Rationale: The three sections are
operating, investing and financing.
Topic: Sections in Statement of Cash Flows
LO: 3, 4
3. Information about noncash investing and financing activities must be disclosed in a
schedule that is separate from the statement of cash flows.
Answer: True
Rationale: Investors want to know about all the company’s investing and financing, not
just those transactions that required an actual cash outlay.
Topic: Direct versus Indirect Statement of Cash Flows
LO: 2
4. Two different methods of determining and presenting the net cash flow from operating
activities are the direct method and the reconciliation method.
Answer: False
Rationale: The two methods are the direct and indirect method.
Topic: Format of the Statement of Cash Flows
LO: 1
5. The net change in cash during a period must equal the net change in all other
balance sheet accounts.
Answer: True
Rationale: The net change in cash affected other accounts via operating, investing,
and financing transactions. Given double-entry bookkeeping, the two must balance.
© Cambridge Business Publishers, 2021
B-2 Financial Statement Analysis & Valuation, 6th Edition
, Topic: Indirect Method of Statement of Cash Flows
LO: 2
6. The direct method of presenting the net cash flow from operating activities reconciles
net income to the net cash flow from operating activities.
Answer: False
Rationale: It is the indirect method that reconciles net income to the net cash flow
from operating activities.
Topic: Sections in Statement of Cash Flows
LO: 7
7. The direct method of presenting the net cash flow from operating activities
shows the major categories of operating cash receipts and payments.
Answer: True
Rationale: The direct method lists cash received from customers and cash paid for
expenses.
Topic: Operating Section of Statement of Cash Flows
LO: 2
8. If accounts payable decreases during an accounting period, then the cash paid for
merchandise purchased is less than the merchandise purchases for the period.
Answer: False
Rationale: This would be the case if accounts payable increased during the period, not
decreased.
Topic: Operating Section of Statement of Cash Flows
LO: 2
9. If prepaid insurance increases during an accounting period, then the cash paid for
insurance is less than the period’s insurance expense.
Answer: False
Rationale: A decrease in a prepaid amount means that the company paid less for
insurance because it had prepaid it the year before.
Topic: Operating Section of Statement of Cash Flows
LO: 2
10. If accounts receivable decrease during an accounting period, then the cash received
from customers is more than the sales revenue for the period.
Answer: True
Rationale: If receivables decrease, the company has collected cash from a previous
period’s sales.
Topic: Operating Section of Statement of Cash Flows
LO: 2
11. Depreciation expense is added back to net income in determining the net cash flow
from operating activities under the indirect method.
Answer: True
Rationale: No cash is paid for depreciation expense. Therefore it must be added back to
net income
© Cambridge to undo
Business the expense
Publishers, 2021 that is included in net income.
B-3 Financial Statement Analysis & Valuation, 6th Edition
STATEßIENT
, Appendix B
Solution Manual for Financial Statement Analysis & Valuation, 6th edition By Peter D. Easton
Computing and Analyzing
Cash Flows
Learning Objectives – Coverage by question
True/False Multiple Choice
LO1 – Describe the framework for the 1-9, 17,
1, 2, 5, 12-14, 18
statement of cash flows. 18, 20, 21, 26
LO2 – Determine and analyze net cash flows 4, 6, 8-11, 15 6-11, 19
from operating activities.
LO3 – Determine and analyze net cash flows 3, 14-16 17-19
from investing activities.
LO4 – Determine and analyze net cash flows 3, 13, 17-19 20-22
from financing activities.
LO5 – Examine and interpret cash flow
information.
LO6 – Compute and interpret ratios 20, 21 23-25
based on operating cash flows.
LO7 – Explain and construct a direct method 7 12-16
statement of cash flows (Appendix BB).
These questions are available to assign in
myBusinessCourse.
© Cambridge Business Publishers, 2021
B-1 Financial Statement Analysis & Valuation, 6th Edition
,Appendix B: Computing and Analyzing Cash Flows
True/False
Topic: Cash and Cash Equivalents
LO: 1
1. The statement of cash flows encompasses only a firm’s cash because cash equivalents
are really marketable securities, which are short-term investments.
Answer: False
Rationale: Cash equivalents may be marketable securities but because they have
very short maturities, they are treated like cash.
Topic: Sections in Statement of Cash Flows
LO: 1
2. The statement of cash flows
separates cash flows into operating,
nonoperating, and financing
categories.
Answer: False
Rationale: The three sections are
operating, investing and financing.
Topic: Sections in Statement of Cash Flows
LO: 3, 4
3. Information about noncash investing and financing activities must be disclosed in a
schedule that is separate from the statement of cash flows.
Answer: True
Rationale: Investors want to know about all the company’s investing and financing, not
just those transactions that required an actual cash outlay.
Topic: Direct versus Indirect Statement of Cash Flows
LO: 2
4. Two different methods of determining and presenting the net cash flow from operating
activities are the direct method and the reconciliation method.
Answer: False
Rationale: The two methods are the direct and indirect method.
Topic: Format of the Statement of Cash Flows
LO: 1
5. The net change in cash during a period must equal the net change in all other
balance sheet accounts.
Answer: True
Rationale: The net change in cash affected other accounts via operating, investing,
and financing transactions. Given double-entry bookkeeping, the two must balance.
© Cambridge Business Publishers, 2021
B-2 Financial Statement Analysis & Valuation, 6th Edition
, Topic: Indirect Method of Statement of Cash Flows
LO: 2
6. The direct method of presenting the net cash flow from operating activities reconciles
net income to the net cash flow from operating activities.
Answer: False
Rationale: It is the indirect method that reconciles net income to the net cash flow
from operating activities.
Topic: Sections in Statement of Cash Flows
LO: 7
7. The direct method of presenting the net cash flow from operating activities
shows the major categories of operating cash receipts and payments.
Answer: True
Rationale: The direct method lists cash received from customers and cash paid for
expenses.
Topic: Operating Section of Statement of Cash Flows
LO: 2
8. If accounts payable decreases during an accounting period, then the cash paid for
merchandise purchased is less than the merchandise purchases for the period.
Answer: False
Rationale: This would be the case if accounts payable increased during the period, not
decreased.
Topic: Operating Section of Statement of Cash Flows
LO: 2
9. If prepaid insurance increases during an accounting period, then the cash paid for
insurance is less than the period’s insurance expense.
Answer: False
Rationale: A decrease in a prepaid amount means that the company paid less for
insurance because it had prepaid it the year before.
Topic: Operating Section of Statement of Cash Flows
LO: 2
10. If accounts receivable decrease during an accounting period, then the cash received
from customers is more than the sales revenue for the period.
Answer: True
Rationale: If receivables decrease, the company has collected cash from a previous
period’s sales.
Topic: Operating Section of Statement of Cash Flows
LO: 2
11. Depreciation expense is added back to net income in determining the net cash flow
from operating activities under the indirect method.
Answer: True
Rationale: No cash is paid for depreciation expense. Therefore it must be added back to
net income
© Cambridge to undo
Business the expense
Publishers, 2021 that is included in net income.
B-3 Financial Statement Analysis & Valuation, 6th Edition
