, AppendixB S
W
Solution Manual for Financial Statement Analysis & Valuation, 6th edition By Peter D. Easton
WS WS WS WS WS WS WS WS WS WS WS WS WS
Computing and Analyzing Cash WS WS WS WS
Flows
Learning Objectives – Coverage by question WS WS WS WS WS
True/False Multiple ChoiceWS
LO1 – 1-9, 17,
1, 2, 5, 12-14, 18
WS WS
Describe the framework for the statement of cash flo 18, 20, 21, 26
WS WS WS WS
WS WS WS WS WS WS WS WS WS WS WS WS
ws.
LO2 –
4, 6, 8-11, 15 6-11, 19
WS
Determine and analyze net cash flows from operating
WS WS WS WS
WS WS WS WS WS WS WS WS WS
activities.
LO3 –
3, 14-16 17-19
WS
Determine and analyze net cash flows from investing
WS
WS WS WS WS WS WS WS WS WS
activities.
LO4 –
3, 13, 17-19 20-22
WS
Determine and analyze net cash flows from financing
WS WS
WS WS WS WS WS WS WS WS WS
activities.
LO5 – Examine and interpret cash flow information.
WS WS WS WS WS WS WS
LO6 –
20, 21 23-25
WS
Compute and interpret ratios based on operating cas
WS
WS WS WS WS WS WS WS WS
h flows.
WS
LO7 –
7 12-16
WS
Explain and construct a direct method statement of cas
WS WS WS WS WS WS WS WS WS
h flows (Appendix BB).
WS WS WS
These questions are available to assign in myBusinessCourse.
WS WS WS WS WS WS WS
© Cambridge Business Publishers, 2021
WS WS WS WS
B-1
WS
Financial Statement Analysis & Valuation, 6th Editio
WS WS WS WS WS WS
n
,Appendix B: Computing and Analyzing Cash Flows WS WS WS WS WS WS
True/False
Topic: Cash and Cash Equivalents LO
WS WS WS WS WS
:1 WS
1. The statement of cash flows encompasses only a firm’s cash because cash equivalents are re
WS W S W S W S W S W S W S WS W S WS W S W S W S W S
ally marketable securities, which are short-term investments.
WS WS WS WS WS WS
Answer: False WS
Rationale: Cash equivalents may be marketable securities but because they have very short mat
WS WS WS WS WS WS WS WS WS WS WS WS WS
urities, they are treated like cash.
WS WS WS WS WS
Topic: Sections in Statement of Cash Flows L
WS WS WS WS WS WS WS
O: 1 WS
2. The statement of cash flows separates cash flows into operating, nonoperating, and financin
WS WS WS WS WS WS WS WS WS WS WS WS
g categories. WS
Answer: False WS
Rationale: The three sections are operating, investing and financing.
WS WS WS WS WS WS WS WS
Topic: Sections in Statement of Cash Flows L
WS WS WS WS WS WS WS
O: 3, 4 WS WS
3. Information about noncash investing and financing activities must be disclosed in a schedule that is
WS WS WS WS WS WS WS WS WS WS WS WS WS WS WS
separate from the statement of cash flows. WS WS WS WS WS WS
Answer: True WS
Rationale: Investors want to know about all the company’s investing and financing, not just those tra
W S W S W S W S W S W S W S W S W S W S W S W S W S W S WS
nsactions that required an actual cash outlay.
WS WS WS WS WS WS
Topic: Direct versus Indirect Statement of Cash Flows
WS WS WS WS WS WS WS W
LO: 2
S WS
4. Two different methods of determining and presenting the net cash flow from operating activities are
WS WS WS WS WS WS WS WS WS WS WS WS WS WS WS
the direct method and the reconciliation method.
WS WS WS WS WS WS
Answer: False WS
Rationale: The two methods are the direct and indirect method.
WS WS WS WS WS WS WS WS WS
Topic: Format of the Statement of Cash Flows
WS WS WS WS WS WS WS W
LO: 1
S WS
5. The net change in cash during a period must equal the net change in all other balanc
W S W S W S W S W S W S W S W S W S W S W S W S W S W S W S W S
e sheet accounts. W S WS
Answer: True WS
Rationale: The net change in cash affected other accounts via operating, investing, and financing tra
W S W S W S W S W S W S W S W S W S W S W S W S W S WS
nsactions. Given double-entry bookkeeping, the two must balance.
WS WS WS WS WS WS WS
© Cambridge Business Publishers, 2021
WS WS WS WS
B-2
WS
Financial Statement Analysis & Valuation, 6th Editio
WS WS WS WS WS WS
n
, Topic: Indirect Method of Statement of Cash Flows
WS WS WS WS WS WS WS
LO: 2
WS WS
6. The direct method of presenting the net cash flow from operating activities reconciles net income to
WS WS WS WS WS WS WS WS WS WS WS WS WS WS WS WS
the net cash flow from operating activities.
WS WS WS WS WS WS
Answer: False WS
Rationale: It is the indirect method that reconciles net income to the net cash flow from ope
W S W S W S W S W S W S W S W S W S W S W S W S W S W S W S W S
rating activities. WS
Topic: Sections in Statement of Cash Flows L
WS WS WS WS WS WS WS
O: 7 WS
7. The direct method of presenting the net cash flow from operating activities shows the major
WS WS WS WS WS WS WS WS WS WS WS WS WS WS
categories of operating cash receipts and payments.
WS WS WS WS WS WS WS
Answer: True WS
Rationale: The direct method lists cash received from customers and cash paid for expenses.
WS WS WS WS WS WS WS WS WS WS WS WS WS
Topic: Operating Section of Statement of Cash Flows
WS WS WS WS WS WS WS WS
LO: 2 WS
8. If accounts payable decreases during an accounting period, then the cash paid for merch
W S W S W S W S W S W S W S W S W S W S W S W S W S
andise purchased is less than the merchandise purchases for the period.
WS WS WS WS WS WS WS WS WS WS
Answer: False WS
Rationale: This would be the case if accounts payable increased during the period, not decreased.
WS WS WS WS WS WS WS WS WS WS WS WS WS WS
Topic: Operating Section of Statement of Cash Flows
WS WS WS WS WS WS WS WS
LO: 2 WS
9. If prepaid insurance increases during an accounting period, then the cash paid for insurance is less
WS WS WS WS WS WS WS WS WS WS WS WS WS WS WS WS
than the period’s insurance expense.
WS WS WS WS
Answer: False WS
Rationale: A decrease in a prepaid amount means that the company paid less for insurance becaus
WS WS WS WS WS WS WS WS WS WS WS WS WS WS WS
e it had prepaid it the year before.
WS WS WS WS WS WS WS
Topic: Operating Section of Statement of Cash Flows
WS WS WS WS WS WS WS WS
LO: 2 WS
10. If accounts receivable decrease during an accounting period, then the cash received from customer
WS WS WS WS WS WS WS WS WS WS WS WS WS
s is more than the sales revenue for the period.
WS WS WS WS WS WS WS WS WS
Answer: True WS
Rationale: If receivables decrease, the company has collected cash from a previous period’s sales.
WS WS WS WS WS WS WS WS WS WS WS WS WS
Topic: Operating Section of Statement of Cash Flows
WS WS WS WS WS WS WS WS
LO: 2 WS
11. Depreciation expense is added back to net income in determining the net cash flow from operating
WS WS W S WS WS WS WS WS WS WS WS WS WS WS WS W
activities under the indirect method.
S WS WS WS WS
Answer: True WS
Rationale: No cash is paid for depreciation expense. Therefore it must be added back to net income
WS WS WS WS WS WS WS WS WS WS WS WS WS WS WS WS
to undo the expense that is included in net income.
WS WS WS WS WS WS WS WS WS WS
© Cambridge Business Publishers, 2021
WS WS WS WS
B-3
WS
Financial Statement Analysis & Valuation, 6th Editio
WS WS WS WS WS WS
n
W
Solution Manual for Financial Statement Analysis & Valuation, 6th edition By Peter D. Easton
WS WS WS WS WS WS WS WS WS WS WS WS WS
Computing and Analyzing Cash WS WS WS WS
Flows
Learning Objectives – Coverage by question WS WS WS WS WS
True/False Multiple ChoiceWS
LO1 – 1-9, 17,
1, 2, 5, 12-14, 18
WS WS
Describe the framework for the statement of cash flo 18, 20, 21, 26
WS WS WS WS
WS WS WS WS WS WS WS WS WS WS WS WS
ws.
LO2 –
4, 6, 8-11, 15 6-11, 19
WS
Determine and analyze net cash flows from operating
WS WS WS WS
WS WS WS WS WS WS WS WS WS
activities.
LO3 –
3, 14-16 17-19
WS
Determine and analyze net cash flows from investing
WS
WS WS WS WS WS WS WS WS WS
activities.
LO4 –
3, 13, 17-19 20-22
WS
Determine and analyze net cash flows from financing
WS WS
WS WS WS WS WS WS WS WS WS
activities.
LO5 – Examine and interpret cash flow information.
WS WS WS WS WS WS WS
LO6 –
20, 21 23-25
WS
Compute and interpret ratios based on operating cas
WS
WS WS WS WS WS WS WS WS
h flows.
WS
LO7 –
7 12-16
WS
Explain and construct a direct method statement of cas
WS WS WS WS WS WS WS WS WS
h flows (Appendix BB).
WS WS WS
These questions are available to assign in myBusinessCourse.
WS WS WS WS WS WS WS
© Cambridge Business Publishers, 2021
WS WS WS WS
B-1
WS
Financial Statement Analysis & Valuation, 6th Editio
WS WS WS WS WS WS
n
,Appendix B: Computing and Analyzing Cash Flows WS WS WS WS WS WS
True/False
Topic: Cash and Cash Equivalents LO
WS WS WS WS WS
:1 WS
1. The statement of cash flows encompasses only a firm’s cash because cash equivalents are re
WS W S W S W S W S W S W S WS W S WS W S W S W S W S
ally marketable securities, which are short-term investments.
WS WS WS WS WS WS
Answer: False WS
Rationale: Cash equivalents may be marketable securities but because they have very short mat
WS WS WS WS WS WS WS WS WS WS WS WS WS
urities, they are treated like cash.
WS WS WS WS WS
Topic: Sections in Statement of Cash Flows L
WS WS WS WS WS WS WS
O: 1 WS
2. The statement of cash flows separates cash flows into operating, nonoperating, and financin
WS WS WS WS WS WS WS WS WS WS WS WS
g categories. WS
Answer: False WS
Rationale: The three sections are operating, investing and financing.
WS WS WS WS WS WS WS WS
Topic: Sections in Statement of Cash Flows L
WS WS WS WS WS WS WS
O: 3, 4 WS WS
3. Information about noncash investing and financing activities must be disclosed in a schedule that is
WS WS WS WS WS WS WS WS WS WS WS WS WS WS WS
separate from the statement of cash flows. WS WS WS WS WS WS
Answer: True WS
Rationale: Investors want to know about all the company’s investing and financing, not just those tra
W S W S W S W S W S W S W S W S W S W S W S W S W S W S WS
nsactions that required an actual cash outlay.
WS WS WS WS WS WS
Topic: Direct versus Indirect Statement of Cash Flows
WS WS WS WS WS WS WS W
LO: 2
S WS
4. Two different methods of determining and presenting the net cash flow from operating activities are
WS WS WS WS WS WS WS WS WS WS WS WS WS WS WS
the direct method and the reconciliation method.
WS WS WS WS WS WS
Answer: False WS
Rationale: The two methods are the direct and indirect method.
WS WS WS WS WS WS WS WS WS
Topic: Format of the Statement of Cash Flows
WS WS WS WS WS WS WS W
LO: 1
S WS
5. The net change in cash during a period must equal the net change in all other balanc
W S W S W S W S W S W S W S W S W S W S W S W S W S W S W S W S
e sheet accounts. W S WS
Answer: True WS
Rationale: The net change in cash affected other accounts via operating, investing, and financing tra
W S W S W S W S W S W S W S W S W S W S W S W S W S WS
nsactions. Given double-entry bookkeeping, the two must balance.
WS WS WS WS WS WS WS
© Cambridge Business Publishers, 2021
WS WS WS WS
B-2
WS
Financial Statement Analysis & Valuation, 6th Editio
WS WS WS WS WS WS
n
, Topic: Indirect Method of Statement of Cash Flows
WS WS WS WS WS WS WS
LO: 2
WS WS
6. The direct method of presenting the net cash flow from operating activities reconciles net income to
WS WS WS WS WS WS WS WS WS WS WS WS WS WS WS WS
the net cash flow from operating activities.
WS WS WS WS WS WS
Answer: False WS
Rationale: It is the indirect method that reconciles net income to the net cash flow from ope
W S W S W S W S W S W S W S W S W S W S W S W S W S W S W S W S
rating activities. WS
Topic: Sections in Statement of Cash Flows L
WS WS WS WS WS WS WS
O: 7 WS
7. The direct method of presenting the net cash flow from operating activities shows the major
WS WS WS WS WS WS WS WS WS WS WS WS WS WS
categories of operating cash receipts and payments.
WS WS WS WS WS WS WS
Answer: True WS
Rationale: The direct method lists cash received from customers and cash paid for expenses.
WS WS WS WS WS WS WS WS WS WS WS WS WS
Topic: Operating Section of Statement of Cash Flows
WS WS WS WS WS WS WS WS
LO: 2 WS
8. If accounts payable decreases during an accounting period, then the cash paid for merch
W S W S W S W S W S W S W S W S W S W S W S W S W S
andise purchased is less than the merchandise purchases for the period.
WS WS WS WS WS WS WS WS WS WS
Answer: False WS
Rationale: This would be the case if accounts payable increased during the period, not decreased.
WS WS WS WS WS WS WS WS WS WS WS WS WS WS
Topic: Operating Section of Statement of Cash Flows
WS WS WS WS WS WS WS WS
LO: 2 WS
9. If prepaid insurance increases during an accounting period, then the cash paid for insurance is less
WS WS WS WS WS WS WS WS WS WS WS WS WS WS WS WS
than the period’s insurance expense.
WS WS WS WS
Answer: False WS
Rationale: A decrease in a prepaid amount means that the company paid less for insurance becaus
WS WS WS WS WS WS WS WS WS WS WS WS WS WS WS
e it had prepaid it the year before.
WS WS WS WS WS WS WS
Topic: Operating Section of Statement of Cash Flows
WS WS WS WS WS WS WS WS
LO: 2 WS
10. If accounts receivable decrease during an accounting period, then the cash received from customer
WS WS WS WS WS WS WS WS WS WS WS WS WS
s is more than the sales revenue for the period.
WS WS WS WS WS WS WS WS WS
Answer: True WS
Rationale: If receivables decrease, the company has collected cash from a previous period’s sales.
WS WS WS WS WS WS WS WS WS WS WS WS WS
Topic: Operating Section of Statement of Cash Flows
WS WS WS WS WS WS WS WS
LO: 2 WS
11. Depreciation expense is added back to net income in determining the net cash flow from operating
WS WS W S WS WS WS WS WS WS WS WS WS WS WS WS W
activities under the indirect method.
S WS WS WS WS
Answer: True WS
Rationale: No cash is paid for depreciation expense. Therefore it must be added back to net income
WS WS WS WS WS WS WS WS WS WS WS WS WS WS WS WS
to undo the expense that is included in net income.
WS WS WS WS WS WS WS WS WS WS
© Cambridge Business Publishers, 2021
WS WS WS WS
B-3
WS
Financial Statement Analysis & Valuation, 6th Editio
WS WS WS WS WS WS
n
