, Appendix B _
Solution_Manual_for_Financial_Statement_Analysis_&_Valuation,_7th_edition_By_Peter_D._Easton
Computing and Analyzing Cas _ _ _
h Flows _
Learning_Objectives_–_Coverage_by_question
True/False Multiple_Choice
LO1_– 1-9,_17,
1,_2,_5,_12-14,_18
_Describe_the_framework_for_the_statement_of_cash_ 18,_20,_21,_26
flows.
LO2_–
4,_6,_8-11,_15 6-11,_19
_Determine_and_analyze_net_cash_flows_from_operati
ng_activities.
LO3_–
3,_14-16 17-19
_Determine_and_analyze_net_cash_flows_from_investi
ng_activities.
LO4_–
3,_13,_17-19 20-22
_Determine_and_analyze_net_cash_flows_from_financin
g_activities.
LO5_–_Examine_and_interpret_cash_flow_information.
LO6_–
20,_21 23-25
_Compute_and_interpret_ratios_based_on_operating_c
ash_flows.
LO7_–
7 12-16
_Explain_and_construct_a_direct_method_statement_of_c
ash_flows_(Appendix_BB).
These_questions_are_available_to_assign_in_myBusinessCourse.
©_Cambridge_Business_Publishers,_20
21_B-1 Financial_Statement_Analysis_&_Valuation,_7th_Editi
on
,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_re
ally_ 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_finan
cing_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_tha
t_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_tra
nsactions_that_required_an_actual_cash_outlay.
Topic:_Direct_versus_Indirect_Statement_of_Cash_Flo
ws_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_Flo
ws_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_tra
nsactions._Given_double-entry_bookkeeping,_the_two_must_balance.
©_Cambridge_Business_Publishers,_20
21_B-2 Financial_Statement_Analysis_&_Valuation,_7th_Editi
on
, Topic:_Indirect_Method_of_Statement_of_Cash_Flo
ws_LO:_2
6. The_direct_method_of_presenting_the_net_cash_flow_from_operating_activities_reconciles_net_incom
e_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_ ope
rating_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_m
ajor_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_Flow
s_LO:_2
8. If_ accounts_ payable_ decreases_ during_ an_ accounting_ period,_ then_ the_ cash_ paid_ for_ mercha
ndise_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_Flow
s_LO:_2
9. If_prepaid_insurance_increases_during_an_accounting_period,_then_the_cash_paid_for_insurance_is_l
ess_than_the_period’s_insurance_expense.
Answer:_False
Rationale:_A_decrease_in_a_prepaid_amount_means_that_the_company_paid_less_for_insurance_bec
ause_it_had_prepaid_it_the_year_before.
Topic:_Operating_Section_of_Statement_of_Cash_Flow
s_LO:_2
10. If_accounts_receivable_decrease_during_an_accounting_period,_then_the_cash_received_from_custo
mers_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_Flow
s_LO:_2
11. Depreciation_expense_is_added_back_to_net_income_in_determining_the_net_cash_flow_from_operati
ng_ activities_under_the_indirect_method.
Answer:_True
Rationale:_No_cash_is_paid_for_depreciation_expense._Therefore_it_must_be_added_back_to_net_inc
ome_to_undo_the_expense_that_is_included_in_net_income.
©_Cambridge_Business_Publishers,_20
21_B-3 Financial_Statement_Analysis_&_Valuation,_7th_Editi
on
Solution_Manual_for_Financial_Statement_Analysis_&_Valuation,_7th_edition_By_Peter_D._Easton
Computing and Analyzing Cas _ _ _
h Flows _
Learning_Objectives_–_Coverage_by_question
True/False Multiple_Choice
LO1_– 1-9,_17,
1,_2,_5,_12-14,_18
_Describe_the_framework_for_the_statement_of_cash_ 18,_20,_21,_26
flows.
LO2_–
4,_6,_8-11,_15 6-11,_19
_Determine_and_analyze_net_cash_flows_from_operati
ng_activities.
LO3_–
3,_14-16 17-19
_Determine_and_analyze_net_cash_flows_from_investi
ng_activities.
LO4_–
3,_13,_17-19 20-22
_Determine_and_analyze_net_cash_flows_from_financin
g_activities.
LO5_–_Examine_and_interpret_cash_flow_information.
LO6_–
20,_21 23-25
_Compute_and_interpret_ratios_based_on_operating_c
ash_flows.
LO7_–
7 12-16
_Explain_and_construct_a_direct_method_statement_of_c
ash_flows_(Appendix_BB).
These_questions_are_available_to_assign_in_myBusinessCourse.
©_Cambridge_Business_Publishers,_20
21_B-1 Financial_Statement_Analysis_&_Valuation,_7th_Editi
on
,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_re
ally_ 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_finan
cing_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_tha
t_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_tra
nsactions_that_required_an_actual_cash_outlay.
Topic:_Direct_versus_Indirect_Statement_of_Cash_Flo
ws_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_Flo
ws_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_tra
nsactions._Given_double-entry_bookkeeping,_the_two_must_balance.
©_Cambridge_Business_Publishers,_20
21_B-2 Financial_Statement_Analysis_&_Valuation,_7th_Editi
on
, Topic:_Indirect_Method_of_Statement_of_Cash_Flo
ws_LO:_2
6. The_direct_method_of_presenting_the_net_cash_flow_from_operating_activities_reconciles_net_incom
e_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_ ope
rating_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_m
ajor_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_Flow
s_LO:_2
8. If_ accounts_ payable_ decreases_ during_ an_ accounting_ period,_ then_ the_ cash_ paid_ for_ mercha
ndise_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_Flow
s_LO:_2
9. If_prepaid_insurance_increases_during_an_accounting_period,_then_the_cash_paid_for_insurance_is_l
ess_than_the_period’s_insurance_expense.
Answer:_False
Rationale:_A_decrease_in_a_prepaid_amount_means_that_the_company_paid_less_for_insurance_bec
ause_it_had_prepaid_it_the_year_before.
Topic:_Operating_Section_of_Statement_of_Cash_Flow
s_LO:_2
10. If_accounts_receivable_decrease_during_an_accounting_period,_then_the_cash_received_from_custo
mers_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_Flow
s_LO:_2
11. Depreciation_expense_is_added_back_to_net_income_in_determining_the_net_cash_flow_from_operati
ng_ activities_under_the_indirect_method.
Answer:_True
Rationale:_No_cash_is_paid_for_depreciation_expense._Therefore_it_must_be_added_back_to_net_inc
ome_to_undo_the_expense_that_is_included_in_net_income.
©_Cambridge_Business_Publishers,_20
21_B-3 Financial_Statement_Analysis_&_Valuation,_7th_Editi
on
