SOLUTION MANUAL
FINANCIAL STATEMENT ANALYSIS VALUATION
© Cambridge Business Publishers, 2021
B-1 Financial Statement Analysis & Valuation, 6th Edition
, 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 Statement Of 1-9, 17,
1, 2, 5, 12-14, 18
Cash Flows. 18, 20, 21, 26
Lo2 – Determine And Analyze Net Cash Flows From
4, 6, 8-11, 15 6-11, 19
Operating Activities.
Lo3 – Determine And Analyze Net Cash Flows From
3, 14-16 17-19
Investing Activities.
Lo4 – Determine And Analyze Net Cash Flows From
3, 13, 17-19 20-22
Financing Activities.
Lo5 – Examine And Interpret Cash Flow Information.
Lo6 – Compute And Interpret Ratios Based On
20, 21 23-25
Operating Cash Flows.
Lo7 – Explain And Construct A Direct Method Statement
7 12-16
Of Cash Flows (Appendix Bb).
These Questions Are Available To Assign In Mybusinesscourse.
© Cambridge Business Publishers, 2021
B-2 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-3 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 To Undo The Expense That Is Included In Net Income.
© Cambridge Business Publishers, 2021
B-4 Financial Statement Analysis & Valuation, 6th Edition
FINANCIAL STATEMENT ANALYSIS VALUATION
© Cambridge Business Publishers, 2021
B-1 Financial Statement Analysis & Valuation, 6th Edition
, 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 Statement Of 1-9, 17,
1, 2, 5, 12-14, 18
Cash Flows. 18, 20, 21, 26
Lo2 – Determine And Analyze Net Cash Flows From
4, 6, 8-11, 15 6-11, 19
Operating Activities.
Lo3 – Determine And Analyze Net Cash Flows From
3, 14-16 17-19
Investing Activities.
Lo4 – Determine And Analyze Net Cash Flows From
3, 13, 17-19 20-22
Financing Activities.
Lo5 – Examine And Interpret Cash Flow Information.
Lo6 – Compute And Interpret Ratios Based On
20, 21 23-25
Operating Cash Flows.
Lo7 – Explain And Construct A Direct Method Statement
7 12-16
Of Cash Flows (Appendix Bb).
These Questions Are Available To Assign In Mybusinesscourse.
© Cambridge Business Publishers, 2021
B-2 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-3 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 To Undo The Expense That Is Included In Net Income.
© Cambridge Business Publishers, 2021
B-4 Financial Statement Analysis & Valuation, 6th Edition
