Solution Manual
Financial Statement Analysis & Valuation,
By Easton, Mcanally, Sommers
7th edition
,Solution Manual For Financial Statement Analysis & Valuation, 7th 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 Of
7 12-16
Cash Flows (Appendix Bb).
These Questions Are Available To Assign In Mybusinesscourse.
,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.
, 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.
Financial Statement Analysis & Valuation,
By Easton, Mcanally, Sommers
7th edition
,Solution Manual For Financial Statement Analysis & Valuation, 7th 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 Of
7 12-16
Cash Flows (Appendix Bb).
These Questions Are Available To Assign In Mybusinesscourse.
,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.
, 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.
