1.2 Statement of Financial Position (Balance Sheet)

Question 1

What items are reported on the statement of financial position (balance sheet)?

Answer 1

Assets
Liabilities
Equity

Question 2

Basic accounting equation

Answer 2

Assets = Liabilities + Equity

Question 3

Basic accounting equation is based on what theory?

Answer 3

Fund theory

The basic equation can be derived to form the proprietary theory

Question 4

_____ are resources controlled by the entity as a result of past events. They represent probable future economic benefits to the entity.

Answer 4

Assets

Question 5

_______ are present obligations of the entity arising from past events. The settlement of liabilities is expected to result in an outflow of economic benefits.

Answer 5

Liabilities

Question 6

_______ is the residual interest in the assets of the entity after subtracting all its liabilities

Answer 6

Equity

Question 7

Non-current assets include

Answer 7

investments and funds
property, plant, and equipment
intangible assets

Question 8

Non-current liabilities include

Answer 8

certain notes and bonds
certain lease liabilities
certain deferred tax liabilities
product or service warranty agreements
deferred revenue
advances for noncurrent commitments to provide goods or services

Question 9

Capital contributions by owners are example of

Answer 9

equity

Question 10

Retained earning is example of

Answer 10

equity

Question 11

treasury stock is example of

Answer 11

equity

Question 12

Limitations of balance sheet

Answer 12

• The financial position reported is at a single point in time; accounts may vary soon before or after the balance sheet date.
• Many items are reported at historical costs rather than fair value
• Balance sheet preparation requires estimates and management judgement
• Items that have financial value but cannot be recorded objectively are omitted from the statement.

Question 13

When classifying assets as current and non-current for reporting purposes

A. Prepayments for items such as insurance or rent are included in an “other assets” group rather than as current assets as they will ultimately be expensed.
B. The time period by which current assets are distinguished from noncurrent assets is determined by the seasonal nature of the business.
C. Assets are classified as current if they are reasonably expected to be realized in cash or consumed during the normal operating cycle
D. The amounts at which current assets are carried and reported must reflect realizable cash values.

Answer 13

C. Assets are classified as current if they are reasonably expected to be realized in cash or consumed during the normal operating cycle

Question 14

A statement of financial position provides a basis for all of the following except

a. Assessing liquidity and financial flexibility.
b. Determining profitability and assessing past performance
c. Computing rates of return
d. Evaluating capital structure

Answer 14

b. Determining profitability and assessing past performance

Question 15

A statement of financial position is intended to help investors and creditors

A. Assess the amount, timing, and uncertainty of prospective net cash inflows of a firm
B. Evaluate changes in the ownership equity of a firm
C. Evaluate economic resources and obligations of a firm
D. Evaluate economic performance of a firm.

Answer 15

C. Evaluate economic resources and obligations of a firm

Question 16

A corporation uses a calendar year for financial and tax reporting purposes and has $100 million of mortgage bonds due on January 15, Year 2. By January 10, Year 2, the corporation intends to refinance this debt with new long-term mortgage bonds and has entered into a financing agreement that clearly demonstrates its ability to consummate the refinancing. This debt is to be

A. Considered off-balance-sheet debt
B. Retired as of December 31, Year 1
C. Classified as a long-term liability on the statement of financial position at December 31, Year 1.
D. Classified as a current liability on the statement of financial position at December 31, Year 1.

Answer 16

C. Classified as a long-term liability on the statement of financial position at December 31, Year 1.