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