CHAPTER 8 PRESENTATION OF FINANCIAL STATEMENTS Statement of financial position PAS. 1 TECHNICAL KNOWLEDGE To identify the components of financial statements. To understand the objective of financial statements. To know the preparation of a statement of financial position. : To identify the minimum line items to be presented in a statement of financial position as required by IFRS. To understand the current and noncurrent classification of assets and liabilities. To know the forms of presenting the statement of financial Position. 145 OCdIINICU WILT vais1RMENT {NANCIAL STATEMEN Fl Lion & ig A phich the informa tements are the means by ineial accountin Fnancial sand processed in fin ated ; the users. accumurc nicated to . y commub sriodically c¢ perid al statements are the end product or main o financial f the financial accounting process ol fi Put are a structured financia ‘i i atements are . uc i Eee ae of the financial position and financia) representa , performance of an entity. General purpose financial statements ‘al purpose financial ity shall prepare and present gener: u i i fae in aocordane with the International Financia} Reporting Standards. i its General purpose financial statement as financial statements are those intended to meet the needs of users who are not in a Position t O require an entity to Prepare reports tailored to their particular information needs. or simply referred to In other words, general purpose financial g directed to alll co: tatements are mmon users and not to speci ific users. Components of financial statements A complete set of financial statements comprises the following components: Statement of financial Income statement Statement of comprehensive income tatement of changes in equity tatement of cash flows lotes, comprising a summ, sin of significant accounting Policies and other explanatory notes Position open accounting 146 OLAINICU WILT U: mSobjective of financial statemonty olyechive of financial statementa ia to provide information the financial position, financial performance and cash ssofanentity that ts ‘ful toa wide range of users in making sions, Kunomic decis Finan atemonts als ‘ ow the results of the management's mvardship of the resour entrusted to it, qo meet this objective, financial statements provide information about the following: 8 ¢. Equity d. Income and expenses, including gains and losses . e. Contributions by and distributions to owners in their capacity as owners, £ Cash flows Frequency of reporting Financial statements shall be presented at least annually. When an entity's end of reporting period changes and financial statements are presented for a period longer or shorter than one year, an entity shall disclose: a, The period covered by the financial statements. ». The reason for using a longer or shorter period. c. The fact that amounts presented in the financial statements are not entirely comparable. Statement of financial position A statement of financial position is a formal statement showing the three elements comprising financial Position, namely “ssets, liabilities and equity. : Investors, creditors and other statement users analyze the © Statement of financial position to evaluate such factors 88 liquids 4 fac financina 'y, solvency and the need of the entity for additional 147 ovammeu wiur camSDefinition of asset ‘An asset is an economic resource controlled by an ent, . result of past event. : An economic resource isa right that has the potential to pug ! 0 Os economic benefits. Classification of assets Assets are classified only into two, namely current assets a, noncurrent assets. nd When an entity supplies goods or services within a clearly identifiable operating cycle, the separate classification of current and noncurrent assets is a useful information b distinguishing between net assets that are continuously circulating as working capital from the net assets useq in long-term operations. The operating cycle of an entity is the time between the acquisition of assets for processing and their realization in cash or cash equivalents. When the entity's normal operating cycle is not clearly identifiable, the duration is assumed to be twelve months, Current assets PAS 1, paragraph 66, provides that an entity shall classify an asset as current when: a. The asset is cash or cash equivalent unless the asset is restricted to settle a liability for more than twelve months after the reporting period. b. The entity holds the asset primarily for the purpose of trading. c. The entity expects to realize the asset ‘within twelve months after the reporting period. d. The entity expects to realize the asset or intends to sell or consume it within the entity's normal operating cycle 148 ovameu wiur camSPresentation of current assets Current assets are usually listed in the order of liquidity. PAS 1, paragraph 54, provides that as a minimum, the line items under current assets are: a. Cash and cash equivalents cps b. Financial assets at fair value such as trading securities and other investments in quoted equity instruments c. Trade and other receivables d. Inventories e. Prepaid expenses Noncurrent assets The caption “noncurrent assets” is a residual definition. PAS 1, paragraph 66, simply states that “an entity shall classify all other assets not classified as current as noncurrent”. In other words, what is not included in the definition of current assets is deemed excluded. All others are classified as noncurrent assets. Accordingly, noncurrent assets include the following: a. Property, plant and equipment b. Long-term investments c. Intangible assets d. Deferred tax assets e. Other noncurrent assets Property, plant and equipment PAS 16, paragraph 6, defines Property, plant and equipment as “tangible assets which are held by an entity for use in Production or supply of goods and services, for rental to others, or for administrative Purposes, and are“expected to be used during more than one period”. Examples of property, plant and equipment include land, ing, machinery, equipment, furniture, fixtures, patterns, Molds, dies and tools, Most Prese Property, plant and equipment, except land, are nted at cost less accumulated depreciation. 149 OULAIIICU WILT uamSLong-term investments ccounting Standards Committee gop ot held by an entity for the accrein of The International A i ent as “an ¢ » by an en . investm' h capital distribution, such ag into, throug! Such a8 interes coe dividends and rentals, for capital APPKEcintion 4! fon other benefits to the investing entity such as thos obtained through trading relationships”. Intangible assets An intangible asset is simply defined as an identifiad, nonmonetary asset without physical substance. The common examples of identifiable intangible Assets include patent, franchise, copyright, lease right, trademark and computer software. Anexample of an unidentifiable intangible asset is goodwil], Other noncurrent assets Other noncurrent assets are those assets that do not fit into the definition of the previously mentioned noncurrent assets, Examples of other noncurrent assets include long-term advances to officers, directors, shareholders and employees, or abandoned property and long-term refundable deposit. Definition of liability A liability is a present obligation of an entity to transfer an economic resource as a result of past event. An obligation is a duty or responsibility that an entity has" Practical ability to avoid, An obligation can either be legal or constructive. A liabili . A . lability is classifigd as current and noncurrent. 150 ovameu wiur camSCurrent liabilit is ' slat a paragraph 69, provides that an entity sball classify pAS t nt when: liability an » entity's ‘The entity expects to settle the liability within the entity’ normal operating cycle. liability primarily for the purpose of b. ‘The entity holds the trading. ‘The liability is due to be settl after the reporting period. led within twelve months 4, The entity does not have an unconditional right to ne sttlement of the liability for at least twelve months afte: the reporting period. Presentation of current liabilities asa minimum, the face of PAS 1, paragraph 54, provides that e hall include the following the statement of financial position s line items for current liabilities: a. Trade and other payables b. Current provisions c. Short-term borrowing d. Current portion of long-term debt e. Current tax liability The term "trade and other payables" is a line item for accounts payable, notes payable, accrued interest on note payable, dividends payable and accrued expenses. No objection can be raised if the trade accounts and notes payable are separately presented. Noncurrent liabilities The term “noncurrent liabilities” is also a residual definition. PAS 1, paragraph 69, provides that all liabiliti i , , ies not cli as current are classified as noncurrent. assified . Noncurrent portion of long-term debt Finance lease liability . Deferred tax liability ng-term obligations to company offic: mg-term deferred revenue ope sp 161 OULAIINICU WILT vamS:Currently maturing long-term debt A liability which is due to be settled within twelve after the reporting period is i m sified as current, evenths n a. The original term was for a period longer than on a 7 months. b. An agreement to refinance or to reschedule Payme, 6 a long-term basis is completed after the reportin, a mn and before the financial statements are authorizeg fa issue. However, if the refinancing on a long-term basis is Completes on or before the end of the reporting period, the refinancing i, an adjusting event and therefore the obligation is Classifieg as noncurrent. Discretion to refinance If the entity has the discretion to refinance or roll Over an obligation for at least twelve months after the Teporting period under an existing loan facility, the obligation jg classified as noncurrent even if it would otherwise be due within a shorter period. The reason for this treatment is that such obligation is considered to form part of the entity's long-term refinancing because the entity has an unconditional right under the existing loan agreement to defer payment for at least twelve months after the end of the reporting period. Note that the refinancing or rolling over must be at the discretion of the entity, Otherwise, if the refinancing or rolling over is not at the aa aes entity, the obligation is classified as # current liability, OCdIIICU WILT vansCovenants s which : ments Covenants are often attached to borrowing agree represent undertakings by the borrower. as to 7 ictions on the borrower Covenants are actually restrictions a dividends, undertaking further borrowings, payi rth. maintaining specified level of working capital and so fo onditions relating to the Under these covenants, if certain c , the liability borrower’s financial situation are breache| becomes payable on demand. Effect of breach of covenants PAS 1, paragraph 74, provides that the liability is classified _as current even if the lender has agreed, after the reporting period and before the statements are authorized for issue, not to demand payment as a consequence of the breach. This liability is classified as current because at reporting date the borrower does not have an unconditional right to defer payment for at least twelve months after the reporting period. However, Paragraph 75 provides that the liability is classified as noncurrent if the lender has agreed on or before the end of reporting period to provide a grace period ending at least twelve months after the end of reporting period, Scanned with CamSy Definition of equity ity i dual interest j The term equity is the residual interest in the ag entity after deducting all of its liabilities, Sety oy, Simply stated, equity means “net assets” or total a8setg liabilities. Min, The terms used in reporting the equity ofan entity depe on the form of the business organization are: "ding a. Owner's equity in a proprietorship b. Partners’ equity in a partnership c, Stockholders’ equity or shareholders’ equity in a corporat However, the term equity may simply be used for all busines, entities. Under PAS 1, paragraph 7, the holders of instrument; classified as equity are simply known as owners, Shareholders’ equity Shareholders’ equity is the residual interest of owners in the net assets of a corporation measured by the excess of assets over liabilities. Generally, the elements constituting shareholders’ equity with their equivalent IAS term are: Philippine term TAS term Capital stock Sh 7 P are capital pubeoribed capital stock Subscribed share capital cae Preference share capital Additi eye Ordinary share capital Retained capital Share premium tained : ss (deficit) Accumulated profits (oss! valuation urge Printed Appropriation reserve Teasury stock Revaluation reserve Treasury share 154 ovammeu wir camSNotes to financial statements Notes £0 eee statements provide narrative description ae eins een ee of items presented in the financia state formation about iti i s pe e t qual a recognition, ms that do not q Notes contain information in addition to that presented in the statement of financial position, income statements statement of comprehensive income, statement of changes jn equity and statement of cash flows. In other words, notes to financial statements are used to report jnformation that does not fit into the body of the financial statements in order to enhance the understandability of the financial statements. ‘ The purpose of the notes to financial statements is "to provide the necessary disclosures required by Philippine Financial Reporting Standards." Forms of statement of financial position In practice, there are two customary forms in presenting the statement of financial position, namely: a. Report form This form sets forth the three major sections in a downward sequence of assets, liabilities and equity. b. Account form the presentation follows that of an assets are shown on the left side d equity on the right side of the As the title suggests, account, meaning, the and the liabilities an statement of financial position. The following is an illustration of the two forms of statement of financial position. 155 ~ovaimeu wit GamS4 form SAMPLAR COMPANY Repor' . sial Position f Financial | Statemer ember 31, 2020 ASSETS Note assets: 1) 500,000 Cgrehandcash equivalents | D 300°000 Financial assets at fair val (2) 700,000 Trade and other receival — & 900,000 Inventories (4) 50,000 Prepaid expenses _ ‘Totalcurrent assets 2,350,009 Noncurrent assets: . Property, plant and equipment _ 6) So oeaea Investment in associate, at equity 1,000, Long-term investments (6) 5,100,000 Intangible assets (7) 2,000,000 Other noncurrent assets (8) _ 100,000 Total noncurrent assets 13,200,000 Total assets 15,550,000 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Trade and other payables (9) 750,000 Note payable - short-term debt 400,000 Current portion of bonds payable 200,000 Warranty liability 50,000 Total current liabilities 1,400,000 aaaeee liabilities: ‘onds payable - remaini i Note payable- due July opon 600,000 Deferred tax liability fan ae 100,000 otal noncurrent liabilities 2,500,000 Shareholders equity ut eserves 2 F100 par 5,000,000 Retained earnings (10) 3,000,000 Total shareholders’ . 3,650,000 , ‘olders’ equity rr 650,000 Total Liabilitie a 8 and shareholders’ equit 580,000 ue 15.50 OCAIINICU WILT vansNote 1 ~ Cash and cash equivalents 40,000 Cash on hand 300,000 Cash in bank is 10,000 Petty cash fund v . BSP Treasury bill, purchased on December 1, 2020 150,000 and due March 1, 2021 500,000 Total cash and cash equivalents —— Note 2 - Trade and other receivables ‘ 580,000 Accounts receivable 20,000) Allowance for doubtful accounts 100,000 Notes receivable 10,000 Accrued interest on notes receivable 30,000 Advances to employees, collectible currently Sean Total trade and other receivables meio Note 3 - Inventories Finished goods 300,000 Goods in process 400,000 Raw inaterials 150,000 Manufacturing supplies 50,000 ‘Total inventories 900,000 Note 4 - Prepaid expenses Office supplies unused 30,000 Prepaid insurance 20,000 Total prepaid expenses 50,000 Note 5 — Property, plant and equipment Boiling 1,500,000 Machinery and equipment ee Furniture and fixtures 000,000 Patterns, molds, dies and tools, net Toe Total 000 Accumulated depreciation 7,400,000 Canryi 2,400,000) ‘arrying amount 000) 5,00 2:000,000 157 OCAIIICU WILT vansciation: peoumlated depre 1,900,09, eed aod equipment 350,0q, in 4 , Meare snd fixtures 150,00 ted depreciation 2,400, otal accumu : ments a note 6- Loneteorm inves . 4 2,000.9 atexpansio? fun 1,009 Piepotment in bonds 53,000,009 Cash surrender value 2001009 Total other long-ter™ investments 5,100,009 0 = Note 7- Intangible assets Patent 500,000 Franchise 1,500,000 —— Total intangible assets 2,000,000 Note 8 - Other noncurrent assets : Long-term refundable deposit 20,000 Long-term advances to officers 80,000 Total othér noncurrent assets 100,000 Note 9 - Trade and other payables Accounts rape T0000 es note payable nett Dividends payable py Accrued expenses noone Total trade and oth ae er payables 750,000 eee Note 10 - Reserves Share premi Retained earning ‘nings appropri : 2,000,000 Total cose ippropriated for contingencies 1,000,000 7 ii 3,000,000 == 158 ovdaimecu wiurCamSAccount form : SAMPLAR COMPANY tatement of Financial Position December 31, 2020 ASSETS Current assets: Cash and cash equivalents 500,000 Financial assets at fair value 200,000 Trade and other receivables 700,000 Inventories 900,000 Prepaid expenses enaan Total current assets 2,350,000 Noncurrent assets: Property, plant and equipment 5,000,000 Investment in associates 1,000,000 Long-term investments 5,100,000 Intangible assets 2,000,000 Other noncurrent assets __ 100,000 Total noncurrent assets 13,200,000 Total assets 15,550,000 LIABILITIES AND EQUITY Current liabilities: Trade and other payables 750,000 Note payable - short-term debt 400,000 Current portion of bonds payable 200,000 Warranty liability 50,000 a Total current liabilities 1,400,000 Noncurrent liabilities: Bonds payable-remaining portion _ 1,800,000 Note payable-due July 1, 2022 600,000 Deferred tax liability 100,000 Total noneurrent liabilities 2,500,000 Equity: Share capital, P100 par —_ 5,000,000 Reserves 3,000,000 Retained carnings 3,650,000 Total equity 11,650,000 Total liabilities and equity 15,550,000 Scanned with CamSitems in statement of financial position uine items . = a ates that as @ minimum, the fae al position shall include the following raph 54, ‘of finanel PAS 1, pat the statemen line items: h equivalents vneial assets (other than 1, 3 and 6) ade and other receivables 7 Loven ee a ipment Property, plant and equi 6 earn in associates accounted for by the equity method 7. Intangible assets 8. Investment property 9: Biological assets 10. Total of assets classified as held for sale and assets included in disposal group classified as held for sale 11. Trade and other payables 12. Current tax liability 13. Deferred tax asset and deferred tax liability. 14. Provisions 15. Financial liabilities (other than 11 and 14) 16. Liabilities included in disposal group classified as held for sale 17. Noncontrolling interest 18. Share capital and reserves In the Philippines, the common practice is to present current assets before noncurrent assets, current liabilities PAS 1, Paragraph i 7 iph 57, provide prescribe the order or ral td in the statement of fu des that the standard does not format in which items are to be presented nancial position, Note th: illustra’, format of the statement of financial position a = ae endix to IAS 1 presents noncurret! Noncurrent liabilities hone edUuity before Liabilities, aM practice in othe ere Current liabilities, ‘This may E r Jurisdiction, like the United Kingdo™ 160 OULdIINICU WILT vamS:QUESTIONS 1. What are financial statements? 2, What: are the components of financial statements? 3. Explain the objective of financial statements. 4, What is the frequency of reporting of financial statements? 5. Define a statement of financial position. 6. What are the essential characteristics of an asset? 7, What are the classifications of assets? 8. Define current assets. -9, What are the line items for current assets? 10. Define noncurrent assets. 11. Identify the noncurrent assets. 12, What are the essential characteristics of a liability? 13, What are the classifications of liabilities? 14, Define current liabilities. 15. What are the line items for current liabilities? 16. Explain the treatment of currently maturing long-term debt. 17. Explain the effect of breach of covenants on the classification of liability. 18. What are the elements comprising the equity of a corporation? 19. What is the meaning of “notes to financial statements”? 20. Explain the two forms of statement of financial Position. 161 OLAIINICU WILT vamSPROBLEMS Problem 8-1 (IAA) Simple Company provided the following account. balances on December 31, 2020: Share capital Share premium Retained earnings Serial bonds payable (P500,000 due every July 1 of each year) Employees income tax payable Notes payable Accrued expenses Accrued interest on note payable Income tax payable Allowance for doubtful accounts Advances from customers Accounts receivable Accumulated depreciation-building Accumulated depreciation-machinery Investment in bonds Land Machinery Factory supplies Notes receivable Building Cash Claim receivable Finished goods Franchise Goods in process Prepaid insurance Raw materials Trading securities Tools, Goodwill Plant expansion fund Accounts payable Required: Prepare a proper on Decemb, er 3] 5,000,009 500,009 880,009 2,500,009 20,009 100,009 30,000 10,000 60,000 50,000 100,000 500,000 1,600,000 1,300,000 1,500,000 1,500,000 2,000,000 50,000 150,000 4,000,000 420,000 20,000 400,000 200,000 600,000 20,000 200,000 250,000 40,000 100,000 500,000 * 300,000 y classified state: i sition 2020. ment of financial po! OCAIINICU WILT vansproblem 8-2 (IAA) Exemplar Company provid f i count balances pe ecember 31, ae led the following a ‘Accounts receivable 400.0%) vances to officers-not curr ; 100, pee eel ‘ers-not currently collectible 400,000 Building 5,000,000 Long-term refundable deposi 50, Cash and cash eauivalente 500,000 Cash surrender value 60,000 Equipment 1,000,000 Patent 100,000 Accrued interest on note: i 10,0! Inventories ces 1,300,000 Land 1,500,000 Land held for speculation 500,000 Notes receivable 250,000 Computer software 3,250,000 Prepaid expenses 70,000 Trading securities 280,000 40,000 Unearned rent income Retained earnings (deficit) (1,800,000) Share premium — preference 500,000 Premium on bonds payable 1,000,000 Preference share capital 2,000,000 Share premium - ordinary 200,000 Notes payable 300,000 SSS payable 10,000 Accounts payable 400,000 Accrued salaries 100,000 Accumulated depreciation-building 2,000,000 Accumulated depreciation-equipment 200,000 Allowance for doubtful accounts 20,000 Bonds payable 5,000,000 Dividends payable 120,000 Ordinary share capital 5,000,000 Withholding tax payable 30,000 Preference share redemption fund 350°000 Required: Prepare a properly classified statement of financial position on December 31, 2020. 163 OLAIINICU WILT vainS‘ A) -oblem 8-3 (IAA . . Proble rovided the following information fo, the prow the statement of financial POSition on M , 20: Relax Company purpose of Pt December 31, 2 100,009 Cash ivable 800,009 Accounts receive a 8 50,0 Allowance for doubtful accounts 1,000'000 Inventories 500,009 Lat 5,000,009 Kenumelated depreciation-building 3000 00 hinery : "200-000 ses ld deprecation machinery 1200.0 000 Equipment 7 iheciarilstad deprecistion ene eet 100,009 Investment in associate 1,300,000 Prepaid expenses 100,000 Notes payable 750,000 Accounts payable 350,000 Income tax payable 50,000 Accrued expenses 60,000 Mortgage note payable in quarterly installments of P100,000 . 2,000,000 Estimated liability for damages : 140,000 Retained earnings appropriated for plant expansion 1,000,000 Retained earnings appropriated for contingencies 100,000 Share capital 8, 000,000 Share premium "300,000 Retained earnings unappropriated \ 0 Trademark See Secret processeg and formulas aera Bank loan payable - due duns 30, 2022 500,000 Required; : P, re j ‘fepare ™ ood form a proper} nancial Position on Decem| and Computations, Y classified statement of ber 81, 2020 with supporting notes OUCAIINICU WILT vansProblem 8-4 (IAA) alances Summa Company revealed the following account balane on December 31, 2020: ‘Accounts payable 1,000,000 ‘Accounts receivable, ni full . nccbunite P50,000 et of allowance for doubtful 600,000 Accrued taxes 50,008 ‘Accrued interest receivable 30,085 Authorized share capital, 50,000 shares, P100 par 5,000,000 Building, net of accumulated depreciation of P2,500,000 8.00% Cash on hand 50,000 Cash in bank 650,000 Bond sinking fund 2,000,000 Furniture and equipment, net of accumulated depreciation of P900,000 1,500,000 Inventory 1,200,000 Investment property 700,000 Land 1,000,000 Deferred tax liability 650,000 Bonds payable due June 30, 2021 2,000,000 Notes payable 850,000 Notes receivable 200,000 Patent 370,000 Other accrued liabilities 150,000 Prepaid expenses 100,000 Share premium 300,000 Retained earnings appropriated for contingencies 200,000 Retained earnings 2,700,000 Share subscription receivable 500,000 Subscribed share capital, 2,000 shares 1,000,000 Unissued share capital 2'000,000 Required: Prepare a statement of financial position, Presented 4nd classified according to generally accepted accounting principles with appropriate notes. OLdIINICU WILT vansMultiple choice (PAS 1) problem 8-5 al statements include all, exeens 1, The major finanel ‘al position in financial position hensive income in equity a. Statement of fini pb, Statement of change Statement of compre: Statement of changes 9. The major financial statements include all, except, a. Statement of financial position b. Income statement c. Statement of cash flows d. Statement of retained earnings What is the objective of financial statements? a. To provide information about the financial posit; financial performance and changes in fina) a position of an entity that is useful to a wide mae 5 ne in making economic decisions. a . To present a statement of financial positi ee of comprehensive income. eon Gad & c. To present relevant, reliable, co e , » com) ae information to invests . To present financial statements in : it all applicable standards. a > Financial statements must be prepared at least a. Annually b. Quarterly c. Semiannually d. Every two years 5. Whe i ae Grech changed the end of reporting period longer ot ne year, the entity shall disclose all, except . Peri ae ae by the financial statements ‘or using a longer or shorter period c. The fact th at comparable nUnts Presented are not entirely le fact imi ‘act that similar entities have done so op 166 ovammeu wiur camSproblem 8-6 Multiple choice (PAS 1) 1 When there is much variability, the operating cycle is measured at a. The mean value b. The median value ¢. Twelve months d. Three years The operating cycle of an entity a. Is the time between the acquisition of materials entering into a process and their realization in cash. b. Is the period of time normally elapsed in converting trade receivables back into cash. c. Is a period of one year. d. Refers to the seasonal variation experienced by entities. wp 3. An entity shall classify an asset as current under all of the following conditions, except a. The entity expects to realize the asset or intends to sell or consume it within the entity's normal operating cycle. . b. The entity holds the asset for the purpose of trading. c. The entity expects to realize the asset within twelve months after the reporting period. d. The asset is cash or a cash equivalent that is restricted to settle a liability for more than twelve months after the reporting period. 4, An entity shall classify a liability as current when under all of the following conditions, except a. The entity expects to settle the liability within the entity's normal operating cycle. b. The entity holds the liability primarily for the purpose of trading. c. The liability is‘due to be settled within twelve months after the reporting period. d. The entity has an unconditional right to defer settlement of the liability for at least twelve months after the reporting period. 167 OLAIINICU WILT vamS5, Which obligatic = a ~ ons are classified as current even jg e due to be settled after more than twelve mont] hig are Gnd of the reporting period? sy ‘Trade payables and aceruals for employee ang nerating cost ; ae b, Current portion of interest-bearing liabilities c. Bank overdrafts d. Dividends payable hs a. Othe, Current and noncurrent presentation of. assetg liabilities provides useful information when the entity ind a. Supplies goods or services within a clearly identifiahy operating cycle °. b. Is a financial institution c. Isa public utility d. Is a nonprofit organization A presentation of assets and liabilities in increasing 0 decreasing order of liquidity provides information that Pi reliable and more relevant than a current and noncurrent presentation for a. Financial institution b. Public utility c. Maniifacturing entity d. Service provider . In the Philippines, the common practice is to present in the statement of financial position a. Current assets before noncurrent assets, current liabilities before noncurrent liabilities and equity after liabilities. b. Noncurrent assets before current assets, noncurrent liabilities betore current liabilities and equity after liabilities. G Current assets before noncurrent assets, noncurrent liabilities before current liabilities and equity aftet liabilities. d. Noncurrent assets before current assets, curr! liabilities before noncurrent liabilities and equity afte" liabilities, 168 ovameu wiur camSRe 10. A financial liability due within twelve months after the reporting period shall be classified as noncurrent a, When it is refinanced on a long-term basis before the issue of financial statements. b. When the entity has no discretion to refinance for at least twelve months, c. When it is refinanced on a long-term basis after the end of reporting period. d. When it is refinanced on a long-term basis on or before the end of reporting period. When an entity breaches under a long-term loan agreement on or before the end of the reporting period with the effect that the liability becomes payable on demand, the liability is classified as a. Current under all circumstances b. Noncurrent under all circumstances c. Current if the lender has agreed after the reporting period and before the issuance of the statements not to demand payment as a consequence of the breach. d. Noncurrent if the lender agreed after the reporting period-to provide a grace period for at least twelve months .after the reporting period. Scanned with CamSProblem 8-7 1 p Multiple choice (IFRS) toment of financial position, an ents, In presenting st make the current and noncurrent presentatio, i ee prosent assets and liabilities in order of liqui a "Must choose either the current and noncurrent oy the liquidity presentation, meaning free choice sf presentation. d. Must make the current and noncurrent presentation, except when a presentation based on liquidity proy;, deg information that is reliable and more relevant. Assets to be sold, consumed or realized as part of the norma} operating cycle are a. Current assets b. Noncurrent assets c. Classified as current or noncurrent in accordance with other criteria d. Noncurrent investments . Liabilities that an entity expects to settle within the normal operating cycle are classified as a. Noncurrent liabilities b. Current or noncurrent liabilities in accordance with other criteria c. Current liabilities d. Equity | . In which section of the statement of financial position should cash that is restricted for the settlement of § liability due 18 months after the reporting period presented? a. Current assets b. Equity ¢. Noncurrent liabilities da. Noncurrent assets 170 ovaimeu wiur vamS5 In which section of the statement of financial position should employment taxes that are due for settlement in 16 months’ time be presented? a. Current liabilities b Current assets Noncurrent liabilities i, Noncurrent assets é An entity has a loan due for repayment in six months’ time but the entity has the option to refinance for repayment two years later. The entity plans to refinance this loan. In which section of the statement of financial position should this loan be presented? a. Current liabilities b. Current assets c. Noncurrent liabilities d. Noncurrent assets Which of the following must be included on the face of the statement of financial position? a. Investment property b. Number of shares authorized ce. Contingent asset d. Shares in an entity owned by that entity Which of the following is not required to be presented as minimum information on the face of the statement of financial position? Investment property Investment accounted under the equity method Biological asset Contingent liability BoP 171 OLAIINICU WILT vamSich of i t be included as a lit which of the following must "YT fin j 9. W'the statement of financial position? tem in the a, Contingent asset d equipment analyzed by class b. Property, plant an Share capital and reserves analyzed by class .d tax liability c. d. Deferre Which statement about the statement of financial posit; tion is not true? _ Biological assets should be reported in the sta of financial position. ‘ement The number of shares authorized for issue should reported in the statement of financial position 0 7 statement of changes in equity or in the notes = c, Provisions should be recognized in th 1 a financial position. © statement of . A revaluation surpl plus on a noncurrent asset i current year should b i i ava the ee e recognized in the income 1 Ss bh 172 f — ovanmeu wir vamSproblem 8-8 Multiple choice (AICPA Adapted) ; 7 s. which .In analyzing an entity's financial statements: eG financial statement would a potential investor PY” use to assess liquidity and financial flexibility? a. Statement of financial position b. Income statement c. Statement of retained earnings d. Statement of cash flows 2. Which is an essential characteristic of an asset? The claims to an asset's benefits are legally enforceable An asset is tangible An asset is obtained at a cost An asset is a right that has the potential to produce economic benefit poop 3. The essential characteristics of an asset.include all of the following, except a. The asset is a present economic resource : b. The economic resource is a right that has the potential to product economic benefit c. The asset is controlled by the entity as a result of past event d. The asset is tangible. 4, Conceptually, asset valuation accounts are a. Assets Neither assets nor liabilities b c. Part of shareholders’ equity d. Liabilities | 5. Working capital is | a. The group of assets needed by the entity to operate profitably. . Capital which has been reinvested in business, b. c. Unappropriated retained earnings. d. Current assets less current liabilities. 178 OCAIINICU WILT vuamSAs generally used, the term net assets represents 6. As 8 tained earnings ae o Uhrent assets less current liabilities «Total contributed capital {. Total assets less total liabilities 7. Treasury shares should be reported as Current asset Investment Other asset ‘ . Reduction of shareholders’ equity ae oe 8. The term "deficit" refers to a. An excess of current assets over current liabilities, b. An excess of current liabilities over current assets, c. A debit balance in retained earnings. d. “A prior period error. 9. When classifying assets as current and noncurrent a. The amounts at which current assets are carried and reported must reflect realizable cash value. b. Prepayments are included in other assets. c. Current assets are determined by the seasonal nature, d. Assets are classified as current if reasonably expected to be realized in cash or consumed during the normal operating cycle. 10. The basis for classifying assets as current or noncurrent is the period of time normally required to convert cash invested in a. Inventory back into cash or 12 months, whichever i§ shorter. b. Receivables back int is longer. ©. Property, plant and equipment back into cash ot 2 ‘ months, whichever is longer. . Inventory back into cash or 12 months, whichever * 0 cash or 12 months, whichevet longer, 174 ovameu wir camSplem 8-9 Multiple choice (AICPA Adapted) pro! 1 which should be classified as current asset? a, Trade installment accounts receivable normally collectible in 18 months ; p. Cash designated for the redemption of callable preference shares ¢, Cash surrender value of a life insurance policy aA deposit on machinery ordered, delivery of which will be made within six months Which should not be considered as current asset? pe a. Installment noies receivable due over 18 months in accordance with normal trade practice b. Prepaid taxes c. Trading securities d. Cast surrender value of life insurance policy Current assets should never include 2 _ A receivable not collectible within one year a. b. Current tax asset ¢. Goodwill arising in a business combination d. Preraium paid on a bond investment Equity investments held to finance construction of additional plant should be classified as = Current assets Property, plant, and equipment Intangible assets ’ Noncurrent investments Bere . Which of the following is not a noncurrent investment? Cash surrender value of life insurance policy Franchise Land held for speculation |. A sinking fund peop 175 ovanmeu wir vamSProblem 8-10 Mul 1. w vas _ a tiple choice (AA) For a liability to exist t event. ‘There must be a pas | E The exact amount must be known. ae’, | * ithe identity of the party to whom the liability is oy9q must be known. . d. There must be an obligation to pay cash in the future, c. Which statement best describes the term liability? a. An excess of equity over current assets b. Resources to meet financial commitments when due c. The residual interest in the assets of the entity afte, | deduction all of the liabilities d. A present obligation arising from past event | Which item is not a current liability? a. Unearned revenue | b. Share dividend payable c. The currently maturing portion of long-term debt d. Trade accounts payable Noncurrent liabilities include a. Bonds payable b. Short-term obligation refinanced on a long-term basis at the end of reporting period Deferred tax liability d. All of these are noncurrent liabilities P . Which is not within the definition of a liability? a. The signing of a three-year employment contract t* fixed annual salary . An obligation. to provide goods in the future A note payable with no specified maturity date . A present obligation that is estimated in amount 176 | ovaimeu wiur camSProblem 8-11 Multiple choice (AA) 1. The statement of financial position is useful 1 for analyzing all of the following, except a. b. c a. Liquidity Solvency Profitability Financial flexibility F the 2. The statement of financial position is useful for all of following, except aeop To compute rate of return qi To analyze cash inflows and outflows for the period To evaluate capital structure - To assess future cash flows . What is one criticism not normally aimed at a statement of financial position? ‘ Boop Failure to reflect current value information The extensive use of separate classifications An extensive use of estimate Failure to include items of financial value that cannot be recorded objectively 4. The statement of financial position peop Omits many items that are of financial value Makes very limited use of judgment and estimate Uses fair value for most assets and liabilities All of the choices are correct 5. Which is a limitation of a statement of financial Position? Boop Many items that are of financial v; Judgment and estimate are used Current fair value is not reported ‘alue are omitted, . All of these are a limitation of th, e state : financial position ement of 177 OCAIINICU WILT vansaaa 6. The amount of time that is expected to elapse un * aaset -i8 realized or otherwise converted into ar ay referred to as Nig a. Solvency ; b. Financial flexibility c. Liquidity d. Exchangeability 7. Which of the following is not an acceptable major oe classification? et a. Current assets b. Investments : c. Property, plant, and equipment. d. Deferred charges 8, What is an example of an item which is not an element of working capital? . a. Accrued interest on notes receivable b. Goodwill c. Goods in process d. Temporary investments 9. Accrued revenue would normally appear in the statement of financial position under a. Noncurrent assets b. Current liabilities c. Noncurrent liabilities d. Current assets 10. Which of the following is usually classified as 4 noncurrent asset? a. Plant expansion fund b. Prepaid rent c. Supplies a. Goods in process 178 OULAIINICU WILT uamsSproblem 8-12 Multiple choice (IAA) 1, Notes £0 financial statements a. Are relatively unimportant facts that do not belong in the basic financial statements. p, Document the source of financial statement facts. ¢. Are an integral part of an entity's financial statements. @. Are irrelevant facts that are immaterial in amount. Which of the following best demonstrates the full disclosure principle? The separate income statement The auditor's report The tax return . The notes to financial statements Booey To meet the needs of full disclosure, entities use supplemental information including ~ a. Parenthetical comments or modifying comments placed on the face of the financial statements. b. Disclosure notes conveying additional insights about operations, accounting principles, contractual agreements and pending litigation. c. Supplemental financial statements that report more detailed information d. All of these are correct 4.The recognition and measurement concepts recognize which of the following as a principle rather than an assumption? a. Time period b. Monetary unit ce. Going concern d. Full disclosure 5. The full disclosure principle requires a balance between a. Comparability and consistency . Relevance and cost effectiveness c. Reliability and neutrality d. Timeliness and predictive value 179 OLAIIICU WILT uamS