Statement of Financial Position (Balance Sheet) 1.

Statement of Financial Position (Balance Sheet) ‫قائمة المركز المالي‬

1) It reports the amounts of assets, liabilities, and equity and their relationships at a moment in time, such as at the end of the
fiscal year.  Assets: Items of value
2) It helps users assess liquidity, financial flexibility, efficiency with which assets are used,  Liabilities: Debt
 Equity: Net Worth
capital structure, and risk.
3) The basic accounting equation presents a perfect balance between the entity's resources and its capital structure. The
resources consist of assets deployed to earn a return. The capital structure consists of amounts contributed by ‫يساهم بها‬
creditors (liabilities) and investors (equity).

Assets = Liabilities + Equity

4) The equation is based on the proprietary theory: ‫نظرية الملكية‬
Equity is what remains after the economic obligations are deducted from economic resources.

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Elements of the Balance Sheet
Assets – are resources controlled by the entity as a result of past events and represent probable future economic benefits to the
entity.

Liabilities – are present obligations arising from past events and their settlement is expected to result in an outflow of economic
benefits

Equity – are the residual interest in the assets after subtracting all liabilities
Equity is not only affected by operations but also by transactions with owners, such as dividends and contributions

1) Investments by owners: are increases in equity. They result from transfers of something of value to increase ownership
interests ‫ حصص الملكية‬. Assets are most commonly transferred item, but services can be exchanged for equity interests ‫حق‬
‫ الملكية‬.
2) Distributions to owners: are decreases in equity. They result from transferring assets to owners. Distribution to owners
decreases the ownership interest in the company.
 Assets and liabilities are separated into current and noncurrent categories
 Assets are reported in order of liquidity

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Current Assets:
 Those expected to be realized in cash, sold or consumed within the operating cycle or one year whichever is longer.
 Generally reported in descending order of liquidity ‫من اعلى سيوله الى اقل سيوله‬

1) Cash and cash equivalents

2) Certain individual trading, available for sale, and held-to-maturity debt securities
3) Receivables
4) Inventories
5) Prepaid expenses: are valued at the cost less the expired or used a portion

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Non-Current Assets:
 Those not qualifying as current assets

1) Investments & Funds: include non-operating items, intended to be held beyond the longer of 1 year or the operating cycle.
a) Investments in securities to control or influence another entity
b) Available for sale, held to maturity debt securities
c) Restricted funds‫أصل مقيد‬: for the use of other than current operation.
Retire long term debt, pension obligations, pay for the acquisition or construction of noncurrent assets
‫ بضاعة او كاش تمتلكه الشركة و يكون مقيد لضمان قرض او تسديد بناء مشروع ال يمكن التصرف به‬: ‫االصل المقيد‬

2) Property, plant and equipment (PPE): are tangible operating items, recorded at cost and reported net of accumulated
depreciation. 10
f) Leasehold improvements ‫تحسينات العقارات المستأجره‬ a) Land and natural resources subject to depletion‫استنفاذ‬,
g) Land improvements e.g., oil and gas
h) Assets held under capital leases ‫األصول المحتفظ بها بموجب عقود إيجار‬ b) Buildings
‫رأسمالية‬ c) Equipment
i) Noncurrent assets under construction d) Furniture
j) Other depreciable assets e) Fixtures ‫تجهيزات‬

3) Intangible assets: nonfinancial assets without physical substance. Examples:

a) Patent ‫براءة االختراع‬
b) Goodwill ‫اسم الشهره‬
c) Copyright ‫حقوق الملكية‬

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Current Liabilities:
 Are expected to be settled or liquated during the longer of the next year or the operating cycle.
 Are expected to be settled or liquated within 1 year from the balance sheet date
 Current liabilities do not include short–term debt if an entity:
1) Intends to refinance them on a noncurrent basis and
2) Demonstrates an ability to do so by entering into a refinancing agreement before the balance sheet is issued.
 Current liabilities presented in descending order of maturity (from the nearest to the farthest) ‫ترتيب تنازلي‬

1) Trade Payables: Items entering into the operating cycle for materials and supplies used in producing goods or services for
sale.
2) Other payables: arising from the operation, such as accrued wages, salaries, rentals, royalties, and taxes.
3) Unearned revenues: Arising from collections in advance of delivering goods or performing services, e.g. Ticket sales
revenue
4) Other obligations: are expected to be liquidated during the longer of the next year or the operating cycle.
a) Short term notes to acquire capital assets.
b) Payments under sinking fund provisions
c) Payments on current portion of serial bonds or other non-current debt
d) Long term obligations that will become callable by the creditors because of the debtor's violation of the debt
agreement at the balance sheet date.
e) Obligations for warranties (guarantees) and estimated returns.

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Non-Current Liabilities:
 Those not qualifying as current

1) Noncurrent notes and bonds

2) Liabilities under capital leases
3) Postretirement benefit obligations
4) Deferred tax liabilities
5) Deferred revenue
6) Obligations under product or service warranty agreements

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Question:

The answer is B
Retired: Cancel

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Equity
Any recognized transaction that does not have an equal and offsetting effects on total assets and total liabilities changes equity

1) Capital contribution by owners (par value of common stocks, preferred stocks and additional paid-in capital)
Additional paid in capital: is the amount received in excess of par value at the time the stock was sold.
2) Retained earnings: accumulated net income not yet distributed to owners
3) Treasury stocks: is the entity's own stock that has been repurchased
a) Reflected as a contra account which reduces the balance of a related account
b) Reported either at cost (as a reduction of total equity) or at par (as a direct reduction of relevant account)
4) Accumulated other comprehensive income: items not included in net income

Balance sheet elements are permanent accounts

Assets, liabilities and equity are recorded in permanent (real) accounts. Their balances at the end of one accounting period (the
balance sheet date) are carried forward as the beginning balances of the next accounting period.

Major balance sheet note disclosures

1) Investment securities (Trading, held to maturity, available for sale)

2) Maturity of bonds issues/ Debts
3) Significant uncertainties, such as pending litigation
4) Details of capital stocks

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Question:

The answer is D

Question:

The answer is D

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Limitations of the Balance Sheet

1) It shows the financial position at a single point in time. Accounts may vary significantly a few days before or after the
publication of the balance sheet.

2) Certain assets are measured at historical cost which may not equal their fair value.

3) The preparation of the balance sheet requires estimates and management judgement.

4) The balance sheet omits many items that cannot be recorded objectively but have financial value to the company such as
human resources and its competitive advantages ‫المزايا التنافسيه‬.

Question

The answer is D

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Off-Balance sheet financing

1) Off-balance sheet financing is financing that is not recorded on a company's balance sheet because it is not strictly debt.
2) It may be used when the business is:
a) Close to its borrowing limit and wants to purchase something
b) as a method of lowering borrowing rates
c) a way of managing risk
d) To improve debt-to-equity and leverage ratios.

Examples on off-balance-sheet financing

1) Operating leases: The asset is kept on the lessor's balance sheet and lessee reports rental expenses for the use of asset.
2) Factoring receivables with recourse: the company remains contingently liable to the finance company in case of debtor
default and the contingent liability does not have to be reported on that company's balance sheet.
3) Special-purposes entities: A firm may create another firm for the sole purpose of keeping the liabilities associated with a
specific project off the parent firm's books.
4) Joint Venture: Accounted for on equity basis, the debt of the joint venture is not reflected as debt of the members of the
joint venture.

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Question Page 40

4. B

5. D

6. B

7. D

8. D

9. A

10. B

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