Financial Statement Analysis & Valuation,
6th Edition
by Peter D. Easton
Complete Module Solutions Manual
are included (Mod 1 to 15)
** Immediate Download
** Swift Response
** All Chapters included
** Exercises/Problems included
,Appendix B
Computing and Analyzing Cash Flows
QUESTIONS
QB-1. Cash equivalents are short-term, highly liquid investments that firms acquire with
temporarily idle cash to earn interest on these excess funds. To be classified as a cash
equivalent, an investment must be (1) easily convertible into a known cash amount and
(2) close enough to maturity so that its market value is not sensitive to interest rate
changes (generally, investments with initial maturities of three months or less). Three
examples of cash equivalents are Treasury bills, commercial paper (short-term notes),
and money market funds.
QB-2. Cash equivalents are included with cash in a statement of cash flows because the
purchase and sale of such investments are considered to be part of a firm's overall
management of cash rather than a source or use of cash. Similarly, as statement users
evaluate cash flows, it may matter very little to them whether the cash is on hand,
deposited in a bank account, or invested in cash equivalents.
QB-3. Operating activities
Inflow: Cash received from customers
Outflow: Cash paid to suppliers and service providers
Investing activities
Inflow: Sale of equipment or investments such as stocks and bonds
Outflow: Purchase of equipment or stocks and bonds
Financing activities
Inflow: Issuance of stock or debt
Outflow: Payment of dividends, repurchase of stock, or repayment of debt
2021
Solutions Manual, Appendix B B-1
,QB-4. a. Investing; outflow
b. Investing; inflow
c. Financing; outflow
d. Operating (direct method, not shown separately under indirect method); inflow.
e. Financing; inflow
f. Operating (direct method, not shown separately under indirect method); inflow.
g. Operating (direct method, shown as supplemental information under indirect
method); outflow.
h. Operating (direct method, not shown separately under indirect method); inflow.
QB-5. This is a noncash investing and financing event. It must be reported in a supplementary
schedule to the statement of cash flows.
QB-6. Noncash investing and financing transactions are disclosed as supplemental
information to a statement of cash flows because a secondary objective of cash flow
reporting is to present information about investing and financing activities. Noncash
investing and financing transactions generally affect future cash flows. Issuing bonds
payable to acquire equipment, for example, requires future cash payments for interest
and principal on the bonds. On the other hand, converting bonds payable into common
stock eliminates future cash payments related to the bonds. Knowledge of these types
of events, therefore, should be helpful to users of cash flow data who wish to assess a
firm's future cash flows.
QB-7. A statement of cash flows helps external users assess the amount, timing, and
uncertainty of future cash flows to the enterprise. These assessments help users
evaluate their own future cash receipts from their investments in, or loans to, the firm. A
statement of cash flows shows the periodic cash effects of a firm's operating, investing,
and financing activities. Distinguishing among these different categories of cash flows
helps users compare, evaluate, and predict cash flows. With cash flow information,
creditors and investors are better able to assess a firm's ability to settle its liabilities and
pay its dividends. Over time, the statement of cash flows permits users to observe and
analyze management's investing and financing policies. A statement of cash flows also
provides information useful in evaluating a firm's financial flexibility (which is its ability to
generate cash to respond to unanticipated needs and opportunities).
QB-8.A The direct method presents the net cash flow from operating activities by showing the
major categories of operating cash receipts and cash payments (such as cash received
from customers, cash paid to employees and suppliers, cash paid for interest, and cash
paid for income taxes). The indirect (or reconciliation) method, in contrast, presents the
net cash flow from operating activities by applying a series of adjustments to the accrual
net income to convert it to a cash basis.
2021
B-2 Financial Statement Analysis & Valuation, 6th Edition
, All Module solutions are given in this PDF however
some extra files are available too with solutions set.
You can copy and paste below link to download
extra files for solutions
https://www.mediafire.com/file/a7ub68mescm04vn/
Extra_Files_-_Financial_Statement_Analysis_%
2526_Valuation_6e_Easton.rar/file
,QB-9. Under the indirect method, depreciation is added to net income because as a noncash
expense, it was deducted in computing net income. Adding depreciation to net income,
therefore, eliminates it from the cash basis income amount. Amortization and depletion
expenses are also added back to net income under the indirect method.
QB-10. Under the indirect method, the $98,000 cash received from the sale of the land will
appear in the cash flows from investing activities section of the statement of cash flows.
In addition, the $28,000 gain from the sale will be deducted from net income as one of
the adjustments made to determine the net cash flow from operating activities.
QB-11. Net Income $ 99,000
Add (Deduct) Items to Convert Net Income to Cash Basis
Depreciation 12,000
Accounts Receivable Decrease 13,000
Inventory Increase (9,000)
Accounts Payable Decrease (3,500)
Income Tax Payable Increase 1,500
Net Cash Provided by Operating Activities $113,000
QB-12. The separate disclosures required for a company using the indirect method in the
statement of cash flows are (1) cash paid during the year for interest (net of amount
capitalized) and for income taxes, (2) all noncash investing and financing transactions,
and (3) the policy for determining which highly liquid, short-term investments are treated
as cash equivalents.
QB-13. The statement of cash flows will show a positive net cash flow from operating activities
if operating cash receipts exceed operating cash payments. This could happen, for
example, if noncash expenses (such as depreciation and amortization) exceed the net
loss. It would also happen if operating cash receipts exceed sales by more than the
loss or if operating cash payments are less than accrual expenses by more than the
loss (or some combination of these events).
QB-14.A Sales $925,000
+ Accounts receivable decrease 14,000
= Cash received from customers $939,000
QB-15.A Wages expense $ 86,000
+ Wages payable decrease 1,100
= Cash paid to employees $ 87,100
QB-16.A Advertising expense $ 43,000
+ Prepaid advertising increase 1,600
= Cash paid for advertising $ 44,600
2021
Solutions Manual, Appendix B B-3
,QB-17.A Under the direct method, the $5,100 cash received from the sale of equipment will
appear in the cash flows from investing activities section of the statement of cash flows.
There is no loss on disposal reported in the operating activities section because the
direct method is used. However, this loss would be included as a reconciling item under
the indirect method.
QB-18.A The separate disclosures required for a company using the direct method in the
statement of cash flows are (1) a reconciliation of net income to net cash flow from
operating activities, (2) all noncash investing and financing transactions, and (3) the
policy for determining which highly liquid, short-term investments are treated as cash
equivalents.
QB-19. The operating cash flow to current liabilities ratio is calculated by dividing a firm’s net
cash flow from operating activities by average current liabilities. This ratio is a measure
of a firm's ability to liquidate its current liabilities with cash generated from operations.
QB-20. The operating cash flow to capital expenditures ratio is calculated by dividing a firm's
net cash flow from operating activities by its annual capital expenditures. A ratio below
1.00 means that the firm's current operating activities do not provide enough cash to
cover the capital expenditures. A ratio above 1.0 is normally considered a sign of
financial strength.
QB-21.
Operating Investing Financing Life-Cycle
Cash Flow Cash Flow Cash Flow Stage
+ – + Growth (late)
+ – – Maturity
– – + Introduction
– + – Decline
.
2021
B-4 Financial Statement Analysis & Valuation, 6th Edition
, MINI EXERCISES
MB-22. (10 minutes)
a. Cash inflow from an operating activity.
b. Cash inflow from an investing activity.
c. Cash outflow from an investing activity.
d. Cash outflow from an operating activity.
e. Cash inflow from a financing activity.
f. Cash outflow from a financing activity.
g. Cash outflow from an investing activity.
h. Cash outflow from an operating activity.
MB-23. (10 minutes)
a. Accounts payable Operating
b. Repayment of debt Financing
c. Stock-based compensation Operating
d. Proceeds from issuance of common stock Financing
e. Inventories Operating
f. Purchase of property and equipment Investing
g. Acquisitions, net of cash acquired Investing
h. Net loss Operating
i. Depreciation Operating
j. Purchase of marketable securities Investing
2021
Solutions Manual, Appendix B B-5
,MB-24. (15 minutes)—Indirect Method
Net Income $ 40,000
Add (Deduct) Items to Convert Net Income to Cash Basis
Depreciation 9,000
Gain on Sale of Investments (11,000)
Accounts Receivable Increase (10,000)
Inventory Increase (6,000)
Prepaid Rent Decrease 1,000
Accounts Payable Increase 5,000
Income Tax Payable Decrease (2,000)
Net Cash Provided by Operating Activities $ 26,000
MB-25. (15 minutes)—Indirect Method
Increase or decrease
Balance sheet item during the year
Trade receivables, net Increase
Inventories Increase
Other assets Decrease
Accounts payable Decrease
Accrued income taxes, net Decrease
Long-term tax liabilities Increase
Other liabilities Increase
MB-26. (15 minutes)—Direct Method
a. Rent Expense $ 65,000
– Prepaid Rent Decrease (3,000)
= Cash Paid for Rent $ 62,000
b. Interest Income $ 15,500
– Interest Receivable Increase (800)
= Cash Received as Interest $ 14,700
c. Cost of Goods Sold $ 87,000
+ Inventory Increase 4,000
+ Accounts Payable Decrease 3,000
= Cash Paid for Merchandise Purchased $ 94,000
2021
B-6 Financial Statement Analysis & Valuation, 6th Edition
,MB-27. (15 minutes)—Direct Method
Sales $785,000
– Accounts Receivable Increase (8,000)
= Cash Received from Customers $777,000
Cost of Goods Sold $450,000
+ Inventory Increase 10,000
+ Accounts Payable Decrease 5,000
= Cash Paid for Merchandise Purchased $465,000
MB-28. (10 minutes)
Company Life-Cycle Stage
a. Growth (late)
b. Maturity
c. Introduction
d. Growth (late)
e. Decline (early)
f. Growth (early)
g. Introduction
h. Decline (late)
MB-29. (20 minutes)
a.
Operating Cash Flow
to Current Liabilities Liquidity
$2,106 / $6,581 = 0.32 Low
$5,668 / $2,181 = 2.60 High
$3,702 / $3,365 = 1.10 Medium High
$2,700 / $5,192 = 0.52 Medium
b.
Operating Cash
to CAPEX Solvency
$2,106 / $2,425 = 0.87 Low
$5,668 / $1,007 = 5.63 High
$3,702 / $1,220 = 3.03 High
$2,700 / $1,984 = 1.36 Medium
2021
Solutions Manual, Appendix B B-7
, MB-30. (20 minutes)
a. Net income computation
Service revenue (record when earned) ..............................$200,000
Wages expense (record when incurred, even if unpaid) ...... (40,000) ($25,000 + $15,000)
Net income ...........................................................................$160,000
b. Net cash flow computation
Cash inflow from services rendered ....................................... $50,000 ($30,000 + $20,000)
Cash outflow for wages paid .................................................. (25,000)
Net cash inflow ....................................................................... $25,000
Cash inflow from services rendered will be $150,000 less than service revenue per the
income statement because Penno only collected $50,000 of revenues in cash but
reported $200,000 as revenue. Cash outflow for wages paid will be $15,000 less than
wages expense on the income statement because $15,000 remained unpaid at year-
end. The combined effects of these two items yields an overall difference of $135,000
between net income and net cash inflow [$160,000 net income and $25,000 net cash
inflows].
2021
B-8 Financial Statement Analysis & Valuation, 6th Edition
