Appendix B
Solution Manual for Financial Statement Analysis & Valuation, 6th 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
7 12-16
of cash flows (Appendix BB).
These questions are available to assign in myBusinessCourse.
© Cambridge Business Publishers, 2021
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
B-2 Financial Statement Analysis & Valuation, 6th Edition
,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
B-4 Financial Statement Analysis & Valuation, 6th Edition
Solution Manual for Financial Statement Analysis & Valuation, 6th 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
7 12-16
of cash flows (Appendix BB).
These questions are available to assign in myBusinessCourse.
© Cambridge Business Publishers, 2021
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
B-2 Financial Statement Analysis & Valuation, 6th Edition
,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
B-4 Financial Statement Analysis & Valuation, 6th Edition
