5.4: Preparation of Classified Statement of Financial Position (Balance)

Question 1

What are current assets in the Statement of Financial Position (SFP)?

Answer 1

Current assets include cash and other assets that will be realized within one year from the date of the SFP or within the operating cycle if it is longer than one year.

These assets are typically expected to be converted into cash or used up during the normal operating cycle.

Question 2

What are the five major items classified as current assets?

Answer 2

Cash: at its stated value.

Short-term investments: at cost/amortized cost or fair value.

Accounts receivable: at the estimated amount that is collectible.

Inventories: at the lower of cost and net realizable value.

Prepaid items: at unexpired or unconsumed cost.

Question 3

How is cash classified in the SFP?

Answer 3

Cash is grouped with other liquid assets and reported as cash and cash equivalents, which include highly liquid investments that are readily convertible into known amounts of cash with an insignificant risk of changing in value.

Question 4

What are cash equivalents?

Answer 4

Cash equivalents are highly liquid and rated certificates of deposit or commercial paper with an original term to maturity of three months or less.

Question 5

What are short-term investments, and how are they classified?

Answer 5

Short-term investments include debt and equity securities presented separately and valued at cost, amortized cost, or fair value.

They are considered short term if they are expected to be sold or realized within 12 months of the SFP date or if held for trading purposes.

Question 6

How are receivables classified in the SFP?

Answer 6

Receivables should be segregated into trade accounts, amounts due from related parties, and unusual items of a substantial amount.

They are valued at their net realizable value, with anticipated losses due to uncollectibles accrued.

Question 7

What are inventories in the Statement of Financial Position?

Answer 7

Inventories are assets:

Held for sale in the ordinary course of business.

In the process of production for sale.

In the form of materials or supplies to be consumed in production or in the rendering of services.

Question 8

How are inventories valued in financial statements?

Answer 8

Inventories are valued at the lower of cost and net realizable value.

The cost can be determined using a cost formula like first-in, first-out (FIFO), weighted average cost, or specific identification.

Question 9

What are the different stages of completion for inventories in manufacturing?

Answer 9

In manufacturing, inventories are classified by their stage of completion into:

Raw materials.
Work-in-process.
Finished goods.

Question 10

What are prepaid expenses, and how are they classified?

Answer 10

Prepaid expenses are expenditures made for services or benefits (e.g., insurance) that will be received within one year or the operating cycle.

They are reported at the unexpired or unconsumed cost.

Question 11

What is the impact of inventory obsolescence on financial statements?

Answer 11

What is the impact of inventory A provision for inventory obsolescence is recognized as an expense during the period, reducing the value of inventories.

This adjustment is based on historical data and expected future sales.

Question 12

What are common examples of prepaid expenses?

Answer 12

Common prepaid expenses include insurance, rent, advertising, property taxes, and office supplies.

Question 13

What factors influence how much inventory a company should hold?

Answer 13

Inventory levels should meet customer demand, tie up as little cash flow as possible, and reduce risks of theft, obsolescence, and excess storage costs.

Just-in-time (JIT) inventory management is one method companies use to reduce storage needs and streamline production.

Question 14

What are the types of non-current investments?

Answer 14

Debt securities: Bonds, long-term notes, and loans receivable, measured at amortized cost or (under IFRS) FV-OCI.

Equity securities: Investments in associates (significant influence), subsidiaries, and non-consolidated subsidiaries, measured using the equity method, consolidated, or at fair value or cost.

Other: Sinking funds, tangible assets held as investments, measured generally at cost.

Question 15

What are Property, Plant, and Equipment (PPE) under IFRS?

Answer 15

PPE are tangible capital assets used in ongoing business operations to generate income.

They include land, buildings, machinery, and other physical property.

These assets are generally carried at cost or amortized cost.

Question 16

How are capital assets like Property, Plant, and Equipment measured and disclosed under IFRS?

Answer 16

PPE are measured at cost, and accumulated depreciation is recorded over time.

Disclosures include additions, disposals, impairments, and foreign exchange differences.

Assets may also be revalued using fair value methods or impaired if their value decreases.

Question 17

What is the significance of capital-intensive assets in industries like real estate, manufacturing, or pharmaceuticals?

Answer 17

Capital-intensive assets require significant investment in long-term revenue-generating assets.

These industries invest in property, plant, and equipment or intangible assets, requiring careful capital management and disclosures.

Question 18

What role does accumulated depreciation play in the presentation of Property, Plant, and Equipment?

Answer 18

Accumulated depreciation reduces the book value of tangible capital assets over time, reflecting the wear and tear or usage of assets.

This figure is subtracted from the asset’s cost to calculate its net book value on the financial statements.

Question 19

What are intangible assets, and how are they categorized?

Answer 19

Intangible assets are capital assets with no physical substance, such as patents, copyrights, trademarks, and trade names. They are categorized into:

Finite lives: Amortized over their useful lives.

Indefinite lives: Not amortized but tested for impairment

Question 20

What is goodwill, and how is it accounted for?

Answer 20

Goodwill is an intangible asset that arises during a business combination, representing the excess of the purchase consideration over the fair value of identifiable net assets acquired.

It is not amortized but tested for impairment.

Question 21

Why are intangible assets and goodwill often ignored by financial analysts?

Answer 21

Intangible assets and goodwill are often ignored because their valuation and measurement are difficult, particularly for internally generated intangibles, which are not recognized on the Statement of Financial Position (SFP).

Question 22

What are deferred income tax assets?

Answer 22

Deferred income tax assets represent the taxes a company may avoid or save in the future due to timing differences between revenue/expenses in financial accounting and taxable income in tax returns.

Question 23

What is the alternative terminology for deferred income tax assets under ASPE?

Answer 23

Under ASPE, deferred income tax assets are referred to as future income tax assets, and deferred income tax liabilities are called future income tax liabilities.

Question 24

What are current liabilities in the Statement of Financial Position (SFP)?

Answer 24

Current liabilities are obligations that are due within one year from the date of the SFP or within the operating cycle, whichever is longer.

Examples include trade accounts payable, wages payable, taxes payable, unearned revenue, and short-term obligations such as bank overdrafts.

Question 25

What are the common types of current liabilities?

Answer 25

Common current liabilities include:

Payables from goods and services (e.g., trade accounts payable, wages payable, taxes payable).

Collections received in advance (e.g., unearned rent or subscriptions).

Liabilities with liquidation during the operating cycle (e.g., portions of long-term bonds).

Short-term financing payable on demand (e.g., bank overdrafts).

Derivative financial instruments.

Question 26

How are current liabilities typically ordered in financial statements?

Answer 26

Current liabilities are not reported in any consistent order, but items such as bank indebtedness, accounts payable, and accrued liabilities are usually listed first, followed by other liabilities like income taxes payable and current maturities of long-term debt.

Question 27

What is working capital, and how is it calculated?

Answer 27

Working capital, also called net working capital, is the excess of total current assets over total current liabilities.

It represents the liquidity buffer available to meet financial demands and is a key indicator of short-term liquidity.

Question 28

What are long-term liabilities in the Statement of Financial Position (SFP)?

Answer 28

Long-term liabilities are obligations that are not reasonably expected to be liquidated within the normal operating cycle.

They include notes payable, deferred tax liabilities, lease liabilities, and pension obligations. These are typically payable at some later date.

Question 29

What are the three general types of long-term liabilities?

Answer 29

Obligations arising from specific financing situations (e.g., bonds, long-term leases, and long-term notes payable).

Obligations arising from ordinary enterprise operations (e.g., pension liabilities, deferred revenue).

Obligations dependent on future events (e.g., warranties, contingencies).

Question 30

What is the role of covenants in long-term debt agreements?

Answer 30

Covenants are conditions that help protect lenders by limiting a company’s financial flexibility.

They may include limits on debt-to-asset ratios or restrictions on dividends.

These conditions provide insight into a company’s financial stability.

Question 31

What are the key components of owners’ equity in the SFP?

Answer 31

Capital shares: Represents the exchange value of shares issued.

Contributed surplus: Includes amounts from repurchased shares at lower than original prices.

Retained earnings: Includes undistributed earnings, sometimes called “earned surplus.”

Accumulated other comprehensive income: Includes unrealized gains/losses on investments or other items.

Question 32

What is the difference between common stock and preferred stock?

Answer 32

Common stock represents ownership in a company with voting rights but typically without a guaranteed dividend.

Preferred stock, often called “ordinary shares” under IFRS, may offer fixed dividends and have priority over common stock in case of liquidation but usually lacks voting rights.

Question 33

What is the purpose of the classified Statement of Financial Position (SFP)?

Answer 33

The purpose of the classified SFP is to provide detailed information on the company’s financial position by listing assets, liabilities, and shareholders’ equity in a structured format.

It helps users assess liquidity, solvency, and financial flexibility by grouping similar accounts.

Question 34

How are current assets typically presented on the SFP?

Answer 34

Current assets are presented in order of liquidity, including:

Cash

Short-term investments (FV-NI investments)

Accounts receivable (net of allowance for expected credit losses)

Inventory (at lower of average cost and net realizable value)

Prepaid expenses

Question 35

What is the treatment for property, plant, and equipment on the SFP?

Answer 35

Property, plant, and equipment are listed under non-current assets and include:

Land (at cost)

Buildings (at cost, less accumulated depreciation)

These assets are shown at their book value (cost less accumulated depreciation).

Question 36

How is shareholders’ equity presented in the SFP?

Answer 36

Shareholders’ equity is presented in components:

Preferred shares (authorized, issued, and outstanding)

Common shares (authorized, issued, and outstanding)

Contributed surplus

Retained earnings

Accumulated other comprehensive income

Question 37

What are current liabilities, and how are they listed on the SFP?

Answer 37

Current liabilities are obligations expected to be settled within one year and include:

Accounts payable

Accrued interest

Income taxes payable

Accrued salaries, wages, and other liabilities

Deposits received from customers