, AppendixB l
SolutionlManuallforlFinanciallStatementlAnalysisl&lValuation,l6thleditionlBylPeterlD.lEaston
ComputingandAnalyzing Cash l l l l
Flows
Learning Objectives – Coverage by question
l l l l l
True/False MultiplelChoice
LO1l– 1-9,l17,
1,l2,l5,l12-14,l18
lDescribelthelframework lforlthelstatementloflcashlflows. 18,l20,l21,l26
LO2l–
4,l6,l8-11,l15 6-11,l19
lDeterminelandlanalyzelnetlcashlflowslfromloperatinglacti
vities.
LO3l–
3,l14-16 17-19
lDeterminelandlanalyzelnetlcashlflowslfromlinvestinglacti
vities.
LO4l–
3,l13,l17-19 20-22
lDeterminelandlanalyzelnetlcashlflowslfromlfinancinglacti
vities.
LO5l–lExaminelandlinterpretlcashlflowlinformation.
LO6l–
20,l21 23-25
lComputelandlinterpretlratioslbasedlonloperatinglcashlflo
ws.
LO7l–
7 12-16
lExplainlandlconstructlaldirectlmethodlstatementloflcashlflo
wsl(AppendixlBB).
TheselquestionslarelavailableltolassignlinlmyBusinessCourse.
©lCambridgelBusinesslPublishers,l2021l
B-1 FinanciallStatementlAnalysisl&lValuation,l6thlEdition
,Appendix B: Computing and Analyzing Cash Flows
l l l l l l
True/False
Topic:lCashlandlCashlEquivalentslLO:l
1
1. Thelstatementloflcashl flowslencompassesl onlylalfirm’slcashlbecauselcashl equivalentslarelreallyl market
ablelsecurities,lwhichlarelshort-termlinvestments.
Answer:lFalse
Rationale:lCashlequivalentslmaylbelmarketablelsecuritieslbutlbecauseltheylhavelverylshortlmaturities,l
theylareltreatedllikelcash.
Topic:lSectionslinlStatementloflCashlFlowslLO:l
1
2. Thelstatementloflcashlflowslseparateslcashlflowslintoloperating,lnonoperating,landlfinancinglcate
gories.
Answer:lFalse
Rationale:lThelthreelsectionslareloperating,linvestinglandlfinancing.
Topic:lSectionslinlStatementloflCashlFlowslLO:l
3,l4
3. Informationlaboutlnoncashlinvestinglandlfinancinglactivitieslmustlbeldisclosedlinlalschedulelthatlislsepara
telfromlthelstatementloflcashlflows.
Answer:lTrue
Rationale:l Investorsl wantl tol knowl aboutl alll thel company’sl investingl andl financing,l notl justl thoseltransactionslth
atlrequiredlanlactuallcashloutlay.
Topic:lDirectlversuslIndirectlStatementloflCashlFlowslL
O:l2
4. Twoldifferentlmethodslofldetermininglandlpresentinglthelnetlcashlflowlfromloperatinglactivitieslareltheldire
ctlmethodlandlthelreconciliationlmethod.
Answer:lFalse
Rationale:lTheltwolmethodslareltheldirectlandlindirectlmethod.
Topic:lFormatloflthelStatementloflCashlFlowslL
O:l1
5. Thel netl changel inl cashl duringl al periodl mustl equall thel netl changel inl alll otherl balancel sheetlaccoun
ts.
Answer:lTrue
Rationale:l Thel netl changel inl cashl affectedl otherl accountsl vial operating,l investing,l andl financingltransactions.l
Givenldouble-entrylbookkeeping,ltheltwolmustlbalance.
©lCambridgelBusinesslPublishers,l2021l
B-2 FinanciallStatementlAnalysisl&lValuation,l6thlEdition
, Topic:lIndirectlMethodloflStatementloflCashlFlowslL
O:l2
6. Theldirectlmethodloflpresentinglthelnetlcashlflowlfromloperatinglactivitieslreconcileslnetlincomeltolthelnetl
cashlflowlfromloperatinglactivities.
Answer:lFalse
Rationale:l Itl isl thel indirectl methodl thatl reconcilesl netl incomel tol thel netl cashl flowl froml operatinglactiviti
es.
Topic:lSectionslinlStatementloflCashlFlowslLO:l
7
7. Theldirectlmethodloflpresentinglthelnetlcashlflowlfromloperatinglactivitieslshowslthelmajorlcateg
orieslofloperatinglcashlreceiptslandlpayments.
Answer:lTrue
Rationale:lTheldirectlmethodllistslcashlreceivedlfromlcustomerslandlcashlpaidlforlexpenses.
Topic:lOperatinglSectionloflStatementloflCashlFlowslLO
:l2
8. Ifl accountsl payablel decreasesl duringl anl accountingl period,l thenl thel cashl paidl forl merchandiselpurc
hasedlisllesslthanlthelmerchandiselpurchaseslforlthelperiod.
Answer:lFalse
Rationale:lThislwouldlbelthelcaseliflaccountslpayablelincreasedlduringlthelperiod,lnotldecreased.
Topic:lOperatinglSectionloflStatementloflCashlFlowslLO
:l2
9. Iflprepaidlinsurancelincreaseslduringlanlaccountinglperiod,lthenlthelcashlpaidlforlinsurancelisllesslthanlth
elperiod’slinsurancelexpense.
Answer:lFalse
Rationale:lAldecreaselinlalprepaidlamountlmeanslthatlthelcompanylpaidllesslforlinsurancelbecauselitlhadl
prepaidlitlthelyearlbefore.
Topic:lOperatinglSectionloflStatementloflCashlFlowslLO
:l2
10. Iflaccountslreceivableldecreaselduringlanlaccountinglperiod,lthenlthelcashlreceivedlfromlcustomerslislmo
relthanlthelsaleslrevenuelforlthelperiod.
Answer:lTrue
Rationale:lIflreceivablesldecrease,lthelcompanylhaslcollectedlcashlfromlalpreviouslperiod’slsales.
Topic:lOperatinglSectionloflStatementloflCashlFlowslLO
:l2
11. Depreciationlexpenselisladdedlbackltolnetlincomelinldetermininglthelnetlcashlflowlfromloperatingl activitie
slunderlthelindirectlmethod.
Answer:lTrue
Rationale:lNolcashlislpaidlforldepreciationlexpense.lThereforelitlmustlbeladdedlbackltolnetlincomeltolundol
thelexpenselthatlislincludedlinlnetlincome.
©lCambridgelBusinesslPublishers,l2021l
B-3 FinanciallStatementlAnalysisl&lValuation,l6thlEdition
SolutionlManuallforlFinanciallStatementlAnalysisl&lValuation,l6thleditionlBylPeterlD.lEaston
ComputingandAnalyzing Cash l l l l
Flows
Learning Objectives – Coverage by question
l l l l l
True/False MultiplelChoice
LO1l– 1-9,l17,
1,l2,l5,l12-14,l18
lDescribelthelframework lforlthelstatementloflcashlflows. 18,l20,l21,l26
LO2l–
4,l6,l8-11,l15 6-11,l19
lDeterminelandlanalyzelnetlcashlflowslfromloperatinglacti
vities.
LO3l–
3,l14-16 17-19
lDeterminelandlanalyzelnetlcashlflowslfromlinvestinglacti
vities.
LO4l–
3,l13,l17-19 20-22
lDeterminelandlanalyzelnetlcashlflowslfromlfinancinglacti
vities.
LO5l–lExaminelandlinterpretlcashlflowlinformation.
LO6l–
20,l21 23-25
lComputelandlinterpretlratioslbasedlonloperatinglcashlflo
ws.
LO7l–
7 12-16
lExplainlandlconstructlaldirectlmethodlstatementloflcashlflo
wsl(AppendixlBB).
TheselquestionslarelavailableltolassignlinlmyBusinessCourse.
©lCambridgelBusinesslPublishers,l2021l
B-1 FinanciallStatementlAnalysisl&lValuation,l6thlEdition
,Appendix B: Computing and Analyzing Cash Flows
l l l l l l
True/False
Topic:lCashlandlCashlEquivalentslLO:l
1
1. Thelstatementloflcashl flowslencompassesl onlylalfirm’slcashlbecauselcashl equivalentslarelreallyl market
ablelsecurities,lwhichlarelshort-termlinvestments.
Answer:lFalse
Rationale:lCashlequivalentslmaylbelmarketablelsecuritieslbutlbecauseltheylhavelverylshortlmaturities,l
theylareltreatedllikelcash.
Topic:lSectionslinlStatementloflCashlFlowslLO:l
1
2. Thelstatementloflcashlflowslseparateslcashlflowslintoloperating,lnonoperating,landlfinancinglcate
gories.
Answer:lFalse
Rationale:lThelthreelsectionslareloperating,linvestinglandlfinancing.
Topic:lSectionslinlStatementloflCashlFlowslLO:l
3,l4
3. Informationlaboutlnoncashlinvestinglandlfinancinglactivitieslmustlbeldisclosedlinlalschedulelthatlislsepara
telfromlthelstatementloflcashlflows.
Answer:lTrue
Rationale:l Investorsl wantl tol knowl aboutl alll thel company’sl investingl andl financing,l notl justl thoseltransactionslth
atlrequiredlanlactuallcashloutlay.
Topic:lDirectlversuslIndirectlStatementloflCashlFlowslL
O:l2
4. Twoldifferentlmethodslofldetermininglandlpresentinglthelnetlcashlflowlfromloperatinglactivitieslareltheldire
ctlmethodlandlthelreconciliationlmethod.
Answer:lFalse
Rationale:lTheltwolmethodslareltheldirectlandlindirectlmethod.
Topic:lFormatloflthelStatementloflCashlFlowslL
O:l1
5. Thel netl changel inl cashl duringl al periodl mustl equall thel netl changel inl alll otherl balancel sheetlaccoun
ts.
Answer:lTrue
Rationale:l Thel netl changel inl cashl affectedl otherl accountsl vial operating,l investing,l andl financingltransactions.l
Givenldouble-entrylbookkeeping,ltheltwolmustlbalance.
©lCambridgelBusinesslPublishers,l2021l
B-2 FinanciallStatementlAnalysisl&lValuation,l6thlEdition
, Topic:lIndirectlMethodloflStatementloflCashlFlowslL
O:l2
6. Theldirectlmethodloflpresentinglthelnetlcashlflowlfromloperatinglactivitieslreconcileslnetlincomeltolthelnetl
cashlflowlfromloperatinglactivities.
Answer:lFalse
Rationale:l Itl isl thel indirectl methodl thatl reconcilesl netl incomel tol thel netl cashl flowl froml operatinglactiviti
es.
Topic:lSectionslinlStatementloflCashlFlowslLO:l
7
7. Theldirectlmethodloflpresentinglthelnetlcashlflowlfromloperatinglactivitieslshowslthelmajorlcateg
orieslofloperatinglcashlreceiptslandlpayments.
Answer:lTrue
Rationale:lTheldirectlmethodllistslcashlreceivedlfromlcustomerslandlcashlpaidlforlexpenses.
Topic:lOperatinglSectionloflStatementloflCashlFlowslLO
:l2
8. Ifl accountsl payablel decreasesl duringl anl accountingl period,l thenl thel cashl paidl forl merchandiselpurc
hasedlisllesslthanlthelmerchandiselpurchaseslforlthelperiod.
Answer:lFalse
Rationale:lThislwouldlbelthelcaseliflaccountslpayablelincreasedlduringlthelperiod,lnotldecreased.
Topic:lOperatinglSectionloflStatementloflCashlFlowslLO
:l2
9. Iflprepaidlinsurancelincreaseslduringlanlaccountinglperiod,lthenlthelcashlpaidlforlinsurancelisllesslthanlth
elperiod’slinsurancelexpense.
Answer:lFalse
Rationale:lAldecreaselinlalprepaidlamountlmeanslthatlthelcompanylpaidllesslforlinsurancelbecauselitlhadl
prepaidlitlthelyearlbefore.
Topic:lOperatinglSectionloflStatementloflCashlFlowslLO
:l2
10. Iflaccountslreceivableldecreaselduringlanlaccountinglperiod,lthenlthelcashlreceivedlfromlcustomerslislmo
relthanlthelsaleslrevenuelforlthelperiod.
Answer:lTrue
Rationale:lIflreceivablesldecrease,lthelcompanylhaslcollectedlcashlfromlalpreviouslperiod’slsales.
Topic:lOperatinglSectionloflStatementloflCashlFlowslLO
:l2
11. Depreciationlexpenselisladdedlbackltolnetlincomelinldetermininglthelnetlcashlflowlfromloperatingl activitie
slunderlthelindirectlmethod.
Answer:lTrue
Rationale:lNolcashlislpaidlforldepreciationlexpense.lThereforelitlmustlbeladdedlbackltolnetlincomeltolundol
thelexpenselthatlislincludedlinlnetlincome.
©lCambridgelBusinesslPublishers,l2021l
B-3 FinanciallStatementlAnalysisl&lValuation,l6thlEdition
