Appendix B
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).
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
Test Bank, Appendix B B-2
,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.
© Cambridge Business Publishers, 2021
B-3 Financial Statement Analysis & Valuation, 6th Edition
,Topic: Operating Cash Flow
LO: 1
12. Cash received from customers for services rendered is classified as a cash flow from operating
activities in a statement of cash flows.
Answer: True
Rationale: Customer related transactions are always operating activities.
Topic: Operating versus Financing Cash Flow
LO: 1, 4
13. Caterpillar Inc. sells heavy equipment and also finances the sales for its customer. The interest
earned from customers on the financing piece of the sale is classified as cash from financing activities
on the statement of cash flows.
Answer: False
Rationale: Customer related transactions are always operating activities, even if the cash is from
financing for the customer.
Topic: Investing Cash Flow
LO: 1, 3
14. Cash received from the sale of one of a firm’s warehouses is classified as a cash flow from operating
activities in a statement of cash flows but only if the warehouse was used for ordinary operations.
Answer: False
Rationale: Long-term productive assets are investment activities.
Topic: Investing Cash Flow
LO: 2, 3
15. A gain from the sale of a company’s property, plant, and equipment does not appear in the statement
of cash flows prepared on the indirect method.
Answer: False
Rationale: A gain from the sale of a company’s property, plant, and equipment is a noncash item that
is deducted from net income to arrive at cash from operations.
Topic: Investing Cash Flow
LO: 3
16. Sales proceeds from disposal of marketable securities that are debt instruments such as long-term
bonds represent cash from investing activities.
Answer: True
Rationale: Marketable securities are investments.
Topic: Financing Cash Flow
LO: 4
17. Cash paid as dividends to stockholders is classified as a cash flow from financing activities in a
statement of cash flows.
Answer: True
Rationale: Dividends paid are transactions with shareholders, which are always financing.
© Cambridge Business Publishers, 2021
Test Bank, Appendix B B-4
,Topic: Financing Cash Flow
LO: 1, 4
18. Cash paid as interest is classified as a cash flow from financing activities in a statement of cash flows
because it arises from short-term and long-term debt, which are both financing activities.
Answer: False
Rationale: Although debt is a financing transaction, the servicing of the debt (the interest payments) is
an operating activity.
Topic: Financing Cash Flow
LO: 4
19. Bonds issued during the year generate cash that is reported in the financing section of the statement
of cash flows.
Answer: True
Rationale: Sales and repurchases of debt are financing transactions.
Topic: Operating Cash Flow Ratios
LO: 6
20. The ratio of operating cash flow to annual capital expenditures is a liquidity ratio.
Answer: False
Rationale: The ratio measures the company’s ability to add new PPE with internally generated funds
as opposed to the need for additional financing.
Topic: Operating Cash Flow Ratios
LO: 6
21. The ratio of operating cash flow to current liabilities is a liquidity ratio.
Answer: True
Rationale: The ratio measures the company’s ability to pay its debts as they come due in the next
year (or operating cycle, whichever is longer).
© Cambridge Business Publishers, 2021
B-5 Financial Statement Analysis & Valuation, 6th Edition
,Multiple Choice
Topic: Format of Statement of Cash Flows
LO: 1
1. The statement of cash flows explains changes in a firm’s:
A) Cash on hand and cash in the bank
B) Cash and cash equivalents
C) Cash, cash equivalents, and accounts receivable
D) Working capital
E) None of these are correct.
Answer: B
Rationale: Changes in cash and near cash (cash equivalents) are explained on the statement of cash
flows. Other accounts such as working capital accounts and accounts receivable are also included.
But the main purpose is to explain changes in cash.
Topic: Cash and Cash Equivalents
LO: 1
2. To qualify as a cash equivalent, an investment must:
A) Be easily convertible into a known cash amount
B) Be three months or more from maturity
C) Be over $100,000 in amount
D) All of the above
E) None of these are correct.
Answer: A
Rationale: Cash equivalents are short-term, highly liquid investments that are (1) easily convertible
into a known cash amount and (2) close enough to maturity so that their market value is not sensitive
to interest rate changes (generally, investments with initial maturities of three months or less).
Topic: Components of Statement of Cash Flow (Numerical calculations required)
LO: 1
3. During the year, a company had the cash flows listed below. What was the total net cash flow for the
year?
Cash inflow from operating activities $81,600
Cash outflow from investing activities 58,560
Cash outflow from financing activities 30,720
Cash outflow from nonoperating activities 26,880
A) Cash outflow of $34,560
B) Cash inflow of $49,920
C) Cash inflow of $19,200
D) Cash outflow of $7,680
E) None of these are correct.
Answer: D
Rationale: Cash inflow from operations – Cash outflow for investing – Cash outflow for financing
$81,600 - $58,560 - $30,720 = -$7,680
© Cambridge Business Publishers, 2021
Test Bank, Appendix B B-6
,Topic: Cash and Cash Equivalents
LO: 1
4. A typical example of a cash equivalent is an investment in:
A) Treasury bills
B) Commercial paper
C) A money market fund
D) All of the above
E) None of these are correct.
Answer: D
Rationale: There are many investments that are very liquid; all of the listed items are cash
equivalents.
Topic: Classification on the Statement of Cash Flows
LO: 1
5. Which of the following is not a category for classifying cash flows in a statement of cash flows?
A) Operating activities
B) Nonoperating activities
C) Financing activities
D) Investing activities
E) None of these are correct.
Answer: B
Rationale: The sections of a statement of cash flow are: operating, investing, and financing.
Topic: Operating Cash Flow
LO: 1, 2
6. A firm’s net cash flow from operating activities includes which of the following:
A) Cash received from sale of equipment
B) Cash received from issuance of common stock
C) Cash received from sale of merchandise
D) Cash received as payment of loan from a borrower
E) None of these are correct.
Answer: C
Rationale: Answers B and D are financing transactions and answer A is an investing transaction.
Topic: Operating Cash Flow
LO: 1, 2
7. Which of the following is classified as a cash flow from operating activities in a statement of cash
flows?
A) Payment of dividends
B) Receipt of dividends
C) Receipt of cash for loan collection
D) Payment of cash for loan repayment
E) None of these are correct.
Answer: B
Rationale: Dividends received are investment income, which is part of operating cash flow.
© Cambridge Business Publishers, 2021
B-7 Financial Statement Analysis & Valuation, 6th Edition
,Topic: Operating Cash Flow
LO: 1, 2
8. In a statement of cash flows, interest received from loans made as investments is classified as a cash
flow from:
A) Operating activities
B) Trading activities
C) Financing activities
D) Investing activities
E) None of these are correct.
Answer: A
Rationale: Even though the loans are investment, interest earned on them is an operating cash flow.
Topic: Operating Cash Flow
LO: 1, 2
9. A firm’s net cash flow from operating activities is not affected by:
A) Cash paid for interest
B) Cash paid to suppliers
C) Cash received for income tax refunds
D) Cash received from customers
E) None of these are correct.
Answer: E
Rationale: All of the items listed are operating activities.
Topic: Operating Cash Flow
LO: 2
10. Which of the following is added to net income to reconcile to cash from operations?
A) Increases in accounts receivable
B) Increases in inventory
C) Increase in taxes payable
D) Decrease in accounts payable
E) None of these are correct.
Answer: C
Rationale: Increases in assets decrease cash, increases in liabilities increase cash.
Topic: Operating Cash Flow
LO: 2
11. Which of the following is added to net income to reconcile to cash from operations?
A) Loss from sale of property, plant and equipment
B) Decrease in accounts receivable
C) Depreciation expense
D) All of the above
E) None of these are correct.
Answer: D
Rationale: Each of the items, A, B, and C, are noncash expenses or cash from operations not
included in net income. They all must be added back.
© Cambridge Business Publishers, 2021
Test Bank, Appendix B B-8
,Topic: Operating Cash Flow
LO: 7
12. Which of the following statements is correct?
A) An increase in accounts receivable is added to sales to convert sales to cash received from
customers.
B) A decrease in prepaid insurance is added to insurance expense to convert insurance expense to
cash paid for insurance.
C) An increase in wages payable is deducted from wages expense to convert wages expense to
cash paid to employees.
D) A decrease in accumulated depreciation is added to depreciation expense to convert depreciation
expense to cash paid for depreciation.
E) None of these are correct.
Answer: C
Rationale: An increase in a payable, such as wages payable, means that the company recorded an
expense but did not pay for it in cash. Therefore, to arrive at cash paid for wages, we must subtract
the increase in the payable. Answers A and B are the opposite, answer D is nonsense.
Topic: Cash Received from Customers (Numerical calculations required)
LO: 7
13. A company reported annual sales revenue of $2,217,600. During the year, accounts receivable
decreased from a $81,600 beginning balance to a $55,680 ending balance.
How much cash was received from customers for the year?
A) $25,920
B) $2,191,680
C) $2,161,920
D) $2,243,520
E) None of these are correct.
Answer: D
Rationale: $2,217,600 + ($81,600 - $55,680) = $2,243,520
Topic: Cash for Inventory (Numerical calculations required)
LO: 7
14. A company reported cost of goods sold of $6614400 for the year. During the year, inventory
increased from a $144,000 beginning balance to a $172,800 ending balance, and accounts payable
increased from a $45,120 beginning balance to a $52,800 ending balance.
How much cash was paid for merchandise purchased during the year?
A) $661,440
B) $640,320
C) $682,560
D) $690,240
E) None of these are correct.
Answer: C
Rationale: $661,440 + ($172,800 - $144,000) - ($52,800 - $45,120) = $682,560
© Cambridge Business Publishers, 2021
B-9 Financial Statement Analysis & Valuation, 6th Edition
, Topic: Cash Paid for Wages (Numerical calculations required)
LO: 7
15. A company reported annual wages expense of $278,400 and insurance expense of $33,600. During
the year, wages payable decreased from an $14,400 beginning balance to a $10,560 ending balance,
and prepaid insurance decreased from a $72,000 beginning balance to a $43,200 ending balance.
How much cash was paid to employees as wages and paid for insurance during the year?
A) $278,400 for wages and $33,600 for insurance
B) $274,560 for wages and $4,800 for insurance
C) $282,240 for wages and $62,400 for insurance
D) $282,240 for wages and $4,800 for insurance
E) None of these are correct.
Answer: D
Rationale: $278,400 + ($14,400 - $10,560) = $282,240 cash paid as wages
$33,600 - ($72,000 - $43,200) = $4,800 cash paid for insurance
Topic: Cash Paid for Interest Expense (Numerical calculations required)
LO: 7
16. A company reported annual interest expense of $37,440. During the year, interest payable decreased
from a $8,160 beginning balance to a $4,512 ending balance.
How much cash was paid for interest during the year?
A) $41,088
B) $41,952
C) $45,240
D) $33,792
E) None of these are correct.
Answer: A
Rationale: $37,440 + ($8,160 - $4,512) = $41,088
Topic: Investing Cash Flow
LO: 1, 3
17. A firm’s cash flow from investing activities includes:
A) Cash received from the sale of a plant asset
B) Cash paid to purchase marketable securities
C) Cash paid for a merger transaction
D) Cash paid to purchase land
E) All of the above
Answer: E
Rationale: Each of the transactions arises from investing activities.
© Cambridge Business Publishers, 2021
Test Bank, Appendix B B-10
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).
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
Test Bank, Appendix B B-2
,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.
© Cambridge Business Publishers, 2021
B-3 Financial Statement Analysis & Valuation, 6th Edition
,Topic: Operating Cash Flow
LO: 1
12. Cash received from customers for services rendered is classified as a cash flow from operating
activities in a statement of cash flows.
Answer: True
Rationale: Customer related transactions are always operating activities.
Topic: Operating versus Financing Cash Flow
LO: 1, 4
13. Caterpillar Inc. sells heavy equipment and also finances the sales for its customer. The interest
earned from customers on the financing piece of the sale is classified as cash from financing activities
on the statement of cash flows.
Answer: False
Rationale: Customer related transactions are always operating activities, even if the cash is from
financing for the customer.
Topic: Investing Cash Flow
LO: 1, 3
14. Cash received from the sale of one of a firm’s warehouses is classified as a cash flow from operating
activities in a statement of cash flows but only if the warehouse was used for ordinary operations.
Answer: False
Rationale: Long-term productive assets are investment activities.
Topic: Investing Cash Flow
LO: 2, 3
15. A gain from the sale of a company’s property, plant, and equipment does not appear in the statement
of cash flows prepared on the indirect method.
Answer: False
Rationale: A gain from the sale of a company’s property, plant, and equipment is a noncash item that
is deducted from net income to arrive at cash from operations.
Topic: Investing Cash Flow
LO: 3
16. Sales proceeds from disposal of marketable securities that are debt instruments such as long-term
bonds represent cash from investing activities.
Answer: True
Rationale: Marketable securities are investments.
Topic: Financing Cash Flow
LO: 4
17. Cash paid as dividends to stockholders is classified as a cash flow from financing activities in a
statement of cash flows.
Answer: True
Rationale: Dividends paid are transactions with shareholders, which are always financing.
© Cambridge Business Publishers, 2021
Test Bank, Appendix B B-4
,Topic: Financing Cash Flow
LO: 1, 4
18. Cash paid as interest is classified as a cash flow from financing activities in a statement of cash flows
because it arises from short-term and long-term debt, which are both financing activities.
Answer: False
Rationale: Although debt is a financing transaction, the servicing of the debt (the interest payments) is
an operating activity.
Topic: Financing Cash Flow
LO: 4
19. Bonds issued during the year generate cash that is reported in the financing section of the statement
of cash flows.
Answer: True
Rationale: Sales and repurchases of debt are financing transactions.
Topic: Operating Cash Flow Ratios
LO: 6
20. The ratio of operating cash flow to annual capital expenditures is a liquidity ratio.
Answer: False
Rationale: The ratio measures the company’s ability to add new PPE with internally generated funds
as opposed to the need for additional financing.
Topic: Operating Cash Flow Ratios
LO: 6
21. The ratio of operating cash flow to current liabilities is a liquidity ratio.
Answer: True
Rationale: The ratio measures the company’s ability to pay its debts as they come due in the next
year (or operating cycle, whichever is longer).
© Cambridge Business Publishers, 2021
B-5 Financial Statement Analysis & Valuation, 6th Edition
,Multiple Choice
Topic: Format of Statement of Cash Flows
LO: 1
1. The statement of cash flows explains changes in a firm’s:
A) Cash on hand and cash in the bank
B) Cash and cash equivalents
C) Cash, cash equivalents, and accounts receivable
D) Working capital
E) None of these are correct.
Answer: B
Rationale: Changes in cash and near cash (cash equivalents) are explained on the statement of cash
flows. Other accounts such as working capital accounts and accounts receivable are also included.
But the main purpose is to explain changes in cash.
Topic: Cash and Cash Equivalents
LO: 1
2. To qualify as a cash equivalent, an investment must:
A) Be easily convertible into a known cash amount
B) Be three months or more from maturity
C) Be over $100,000 in amount
D) All of the above
E) None of these are correct.
Answer: A
Rationale: Cash equivalents are short-term, highly liquid investments that are (1) easily convertible
into a known cash amount and (2) close enough to maturity so that their market value is not sensitive
to interest rate changes (generally, investments with initial maturities of three months or less).
Topic: Components of Statement of Cash Flow (Numerical calculations required)
LO: 1
3. During the year, a company had the cash flows listed below. What was the total net cash flow for the
year?
Cash inflow from operating activities $81,600
Cash outflow from investing activities 58,560
Cash outflow from financing activities 30,720
Cash outflow from nonoperating activities 26,880
A) Cash outflow of $34,560
B) Cash inflow of $49,920
C) Cash inflow of $19,200
D) Cash outflow of $7,680
E) None of these are correct.
Answer: D
Rationale: Cash inflow from operations – Cash outflow for investing – Cash outflow for financing
$81,600 - $58,560 - $30,720 = -$7,680
© Cambridge Business Publishers, 2021
Test Bank, Appendix B B-6
,Topic: Cash and Cash Equivalents
LO: 1
4. A typical example of a cash equivalent is an investment in:
A) Treasury bills
B) Commercial paper
C) A money market fund
D) All of the above
E) None of these are correct.
Answer: D
Rationale: There are many investments that are very liquid; all of the listed items are cash
equivalents.
Topic: Classification on the Statement of Cash Flows
LO: 1
5. Which of the following is not a category for classifying cash flows in a statement of cash flows?
A) Operating activities
B) Nonoperating activities
C) Financing activities
D) Investing activities
E) None of these are correct.
Answer: B
Rationale: The sections of a statement of cash flow are: operating, investing, and financing.
Topic: Operating Cash Flow
LO: 1, 2
6. A firm’s net cash flow from operating activities includes which of the following:
A) Cash received from sale of equipment
B) Cash received from issuance of common stock
C) Cash received from sale of merchandise
D) Cash received as payment of loan from a borrower
E) None of these are correct.
Answer: C
Rationale: Answers B and D are financing transactions and answer A is an investing transaction.
Topic: Operating Cash Flow
LO: 1, 2
7. Which of the following is classified as a cash flow from operating activities in a statement of cash
flows?
A) Payment of dividends
B) Receipt of dividends
C) Receipt of cash for loan collection
D) Payment of cash for loan repayment
E) None of these are correct.
Answer: B
Rationale: Dividends received are investment income, which is part of operating cash flow.
© Cambridge Business Publishers, 2021
B-7 Financial Statement Analysis & Valuation, 6th Edition
,Topic: Operating Cash Flow
LO: 1, 2
8. In a statement of cash flows, interest received from loans made as investments is classified as a cash
flow from:
A) Operating activities
B) Trading activities
C) Financing activities
D) Investing activities
E) None of these are correct.
Answer: A
Rationale: Even though the loans are investment, interest earned on them is an operating cash flow.
Topic: Operating Cash Flow
LO: 1, 2
9. A firm’s net cash flow from operating activities is not affected by:
A) Cash paid for interest
B) Cash paid to suppliers
C) Cash received for income tax refunds
D) Cash received from customers
E) None of these are correct.
Answer: E
Rationale: All of the items listed are operating activities.
Topic: Operating Cash Flow
LO: 2
10. Which of the following is added to net income to reconcile to cash from operations?
A) Increases in accounts receivable
B) Increases in inventory
C) Increase in taxes payable
D) Decrease in accounts payable
E) None of these are correct.
Answer: C
Rationale: Increases in assets decrease cash, increases in liabilities increase cash.
Topic: Operating Cash Flow
LO: 2
11. Which of the following is added to net income to reconcile to cash from operations?
A) Loss from sale of property, plant and equipment
B) Decrease in accounts receivable
C) Depreciation expense
D) All of the above
E) None of these are correct.
Answer: D
Rationale: Each of the items, A, B, and C, are noncash expenses or cash from operations not
included in net income. They all must be added back.
© Cambridge Business Publishers, 2021
Test Bank, Appendix B B-8
,Topic: Operating Cash Flow
LO: 7
12. Which of the following statements is correct?
A) An increase in accounts receivable is added to sales to convert sales to cash received from
customers.
B) A decrease in prepaid insurance is added to insurance expense to convert insurance expense to
cash paid for insurance.
C) An increase in wages payable is deducted from wages expense to convert wages expense to
cash paid to employees.
D) A decrease in accumulated depreciation is added to depreciation expense to convert depreciation
expense to cash paid for depreciation.
E) None of these are correct.
Answer: C
Rationale: An increase in a payable, such as wages payable, means that the company recorded an
expense but did not pay for it in cash. Therefore, to arrive at cash paid for wages, we must subtract
the increase in the payable. Answers A and B are the opposite, answer D is nonsense.
Topic: Cash Received from Customers (Numerical calculations required)
LO: 7
13. A company reported annual sales revenue of $2,217,600. During the year, accounts receivable
decreased from a $81,600 beginning balance to a $55,680 ending balance.
How much cash was received from customers for the year?
A) $25,920
B) $2,191,680
C) $2,161,920
D) $2,243,520
E) None of these are correct.
Answer: D
Rationale: $2,217,600 + ($81,600 - $55,680) = $2,243,520
Topic: Cash for Inventory (Numerical calculations required)
LO: 7
14. A company reported cost of goods sold of $6614400 for the year. During the year, inventory
increased from a $144,000 beginning balance to a $172,800 ending balance, and accounts payable
increased from a $45,120 beginning balance to a $52,800 ending balance.
How much cash was paid for merchandise purchased during the year?
A) $661,440
B) $640,320
C) $682,560
D) $690,240
E) None of these are correct.
Answer: C
Rationale: $661,440 + ($172,800 - $144,000) - ($52,800 - $45,120) = $682,560
© Cambridge Business Publishers, 2021
B-9 Financial Statement Analysis & Valuation, 6th Edition
, Topic: Cash Paid for Wages (Numerical calculations required)
LO: 7
15. A company reported annual wages expense of $278,400 and insurance expense of $33,600. During
the year, wages payable decreased from an $14,400 beginning balance to a $10,560 ending balance,
and prepaid insurance decreased from a $72,000 beginning balance to a $43,200 ending balance.
How much cash was paid to employees as wages and paid for insurance during the year?
A) $278,400 for wages and $33,600 for insurance
B) $274,560 for wages and $4,800 for insurance
C) $282,240 for wages and $62,400 for insurance
D) $282,240 for wages and $4,800 for insurance
E) None of these are correct.
Answer: D
Rationale: $278,400 + ($14,400 - $10,560) = $282,240 cash paid as wages
$33,600 - ($72,000 - $43,200) = $4,800 cash paid for insurance
Topic: Cash Paid for Interest Expense (Numerical calculations required)
LO: 7
16. A company reported annual interest expense of $37,440. During the year, interest payable decreased
from a $8,160 beginning balance to a $4,512 ending balance.
How much cash was paid for interest during the year?
A) $41,088
B) $41,952
C) $45,240
D) $33,792
E) None of these are correct.
Answer: A
Rationale: $37,440 + ($8,160 - $4,512) = $41,088
Topic: Investing Cash Flow
LO: 1, 3
17. A firm’s cash flow from investing activities includes:
A) Cash received from the sale of a plant asset
B) Cash paid to purchase marketable securities
C) Cash paid for a merger transaction
D) Cash paid to purchase land
E) All of the above
Answer: E
Rationale: Each of the transactions arises from investing activities.
© Cambridge Business Publishers, 2021
Test Bank, Appendix B B-10
