SOLUTION MANUAL
Financial Statement Analysis and Valuation
BY PETER D. EASTON
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-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 to
© Cambridge Business Publishers, 2021
undo the expense that is included in net income.
B-3 Financial Statement Analysis & Valuation, 6th Edition
Financial Statement Analysis and Valuation
BY PETER D. EASTON
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-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 to
© Cambridge Business Publishers, 2021
undo the expense that is included in net income.
B-3 Financial Statement Analysis & Valuation, 6th Edition
