Complete Test Bank - Financial Statement Analysis and Valuation, 6th Ed.
By Peter D. Easton.
(All Chapters Covered, Verified Answers)
C
LE
ST
BE
,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. C
The statement of cash flows separates cash flows into operating, nonoperating, and financing categories.
LE
Answer: False
Rationale: The three sections are operating, investing and financing.
ST
BE
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.
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
C
Rationale: It is the indirect method that reconciles net income to the net cash flow from operating activities.
LE
Topic: Sections in Statement of Cash Flows LO: 7
ST
7. The direct method of presenting the net cash flow from operating activities shows the major categories
BE
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.
C
LE
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
ST
activities under the indirect method.
Answer: True
BE
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.
Topic: Operating Cash Flow LO: 1
12. Cash received from customers for services rendered is classified as a cash flow from operating activities
in a statement of cash flows.
Answer: True
Rationale: Customer related transactions are always operating activities.
Topic: Operating versus Financing Cash Flow LO: 1, 4
By Peter D. Easton.
(All Chapters Covered, Verified Answers)
C
LE
ST
BE
,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. C
The statement of cash flows separates cash flows into operating, nonoperating, and financing categories.
LE
Answer: False
Rationale: The three sections are operating, investing and financing.
ST
BE
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.
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
C
Rationale: It is the indirect method that reconciles net income to the net cash flow from operating activities.
LE
Topic: Sections in Statement of Cash Flows LO: 7
ST
7. The direct method of presenting the net cash flow from operating activities shows the major categories
BE
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.
C
LE
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
ST
activities under the indirect method.
Answer: True
BE
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.
Topic: Operating Cash Flow LO: 1
12. Cash received from customers for services rendered is classified as a cash flow from operating activities
in a statement of cash flows.
Answer: True
Rationale: Customer related transactions are always operating activities.
Topic: Operating versus Financing Cash Flow LO: 1, 4
