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Solution Manual for Financial Statement Analysis & Valuation, 6th edition By Peter D. Easton

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Solution Manual for Financial Statement Analysis & Valuation, 6th edition By Peter D. Easton 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. Appendix B: Computing and Analyzing Cash Flows True/False © Cambridge Business Publishers, 2021 B-3 Financial Statement Analysis & Valuation, 6 th 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.

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