Chapter 5

Question 1

Usefulness and purpose of B/S

Answer 1

1. provide information about entity at a point in time
2. Evaluates liquidity and financial flexibility
3. Aids in assessing risk and predicting future cash flows

Question 2

liquidity

Answer 2

ability to pay obligations (current assets vs. current liabilities)

Question 3

limitations of the B/S

Answer 3

1. current value is not always reflected
2. estimates and judgements must be used (collectibility of receivables)
3. Omit many items that are of financial value to the business (value of HR and R&D not reported)
4. amount shown are result of policy choices made
5. Numbers are often consolidated between subsidiaries and this can hide important detail
6. some amounts don’t show up on the B/S, if they don’t meet definition

Question 4

Current assets

Answer 4

Resources expected to be turned into cash, sold or consumed within one year or the operating cycle (whichever is longer)

Question 5

Considerations for current assets

Answer 5

intent and marketability important to classify short term investments

Question 6

restricted cash

Answer 6

excluded from current assets, shown in notes if needed

Question 7

current liabilities

Answer 7

obligations reasonably expected to be liquidated through the use of current assets or creation of other current liabilities

Question 8

current liabilities reported

Answer 8

in the order they will be paid

Question 9

some liabilities that will be paid within a year are reported as long-term liabilities

Answer 9

1. short term debt expected to be refinanced (put into non-current so that current ratio is better)
2. debt that will be retired out of non-current assets

Question 10

non-current investments

Answer 10

readily marketable may be classified as current or long term depending on management intent for holding them
consist of : debt securities and others sinking funds, tangible assets as investment

Question 11

non-current equity investment

Answer 11

subsidiary -consolidation, significant influence on equity method and non-consolidated subsidiaries or investment where no control or influence exists (FV or cost)

Question 12

PPE (property plant and equipment)

Answer 12

IFRS allows an option to carry these assets at FV (instead of historical cost) using revaluation or FV method. written down if impaired

Question 13

Investment property and biological assets

Answer 13

ASPE does not have separate category for it.. part of PPE

Question 14

Intangible assets

Answer 14

resources that lack physical substance but provide economic rights and advantages i.e. patents, franchises, trademarks and organization costs

Question 15

goodwill

Answer 15

excess purchase price of a company over the fair value acquired (earnings potential, if no assets, no goodwill)

Question 16

Intangibles

Answer 16

carried at cost less acc. amortization if finite lives, at cost if indefinite lives (provided they are not at fair value). Both written down if impaired (included in other assets)

Question 17

Expenditures for intangible assets such as R&D is

Answer 17

expensed as incurred, not capitalized

Question 18

Other assets

Answer 18

special classification for unusual items that cannot be included in one of the other asset categories. i.e. deferred charges, non-current receivables, advances to subsidiaries

Question 19

classification of the item depends on

Answer 19

nature AND use

Question 20

long term liabilities

Answer 20

obligations that are not reasonably expected to be liquidated within the normal operating cycle, but payable at some date later

Question 21

3 types of long term liabilities

Answer 21

1. obligations from specific financing situations where additional assets are required
2. obligations from ordinary operations of the enterprise (pension obligation or deferred income tax)
3. obligations dependent upon occurrence or not of one or more future events to confirm the amount payable, payee or date

Question 22

any premium or discount on bonds payable is

Answer 22

disclosed separately as add/less from bonds

Question 23

the currently maturing portion of long term debt classfieid

Answer 23

current liability with remainder being non-current (related premium/discount also as current)

Question 24

supplementary info

Answer 24

existence of debt covenants and restrictions, terms of the debt (maturity dates, interest rates, amounts of securities to support debt)

Question 25

Shareholder’s equity

Answer 25

net assets (assets - liabilities)

Question 26

shareholder’s equity of corporations

Answer 26

1. share capital (common/preferred: how much shareholders have invested)
2. contributed surplus (increase on equity as gains on transactions)
3. retained earnings; undistributed earnings of corporation
4. accumulated other comprehensive income (net of tax)
5. non-controlling interest: claim to the subsidiary’s net assets not controlled by the parent

Question 27

contingencies

Answer 27

uncertainty as to possible losses or gains that will be resolved by a future event (litigation, environmental issues, tax assessments or gov investigation)

Question 28

contingent losses are recorded if

Answer 28

1. likely >50%
2. measurable
   if not disclose in notes

Question 29

Under ASPE contingent liabilities

Answer 29

recorded at lowest end of the range when all points of the range are equally likely

Question 30

Under IFRS contingent liabilities

Answer 30

use of expected value probabilities (accrue midway point)

Question 31

Valuation and accounting policies

Answer 31

should all be disclosed , in the first note or separate summary of significant accounting policies

Question 32

Contractual situations

Answer 32

mandatory that essential provisions of lease contracts, pension obligations be clearly states in notes

Question 33

Subsequent events

Answer 33

events that occur after the fiscal year end but before financial statements are prepared. If they provide further evidence of conditions that existed at the B/S date adjust financial statements –> if not in notes if yes or no there will be a change

Question 34

refinancing troubled debt

Answer 34

under IFRS a liability can be re-classed from current to non-current IF an agreement was reached with lender at B/S date, under ASPE any day before release of B/S

Question 35

Techniques of disclosure

Answer 35

1. parenthetical explanations (prior year comparative)
2. notes (accounting policies and contingencies)
3. cross-reference and contra items (bond discounts)
4. supporting schedules (lease disclosure)
5. Additional disclosure required: reportable segment, related party transaction

Question 36

Operating cycle

Answer 36

amount of time it takes to convert raw materials into final product and sold

Question 37

current/non-current classification

Answer 37

be disclosed separately except if presentation is based on liquidity would provide information that is reliable and relevant –> all presented broadly in order of liquidity

Question 38

working capital

Answer 38

current assets and liabilities

Question 39

deferred income tax

Answer 39

IFRS always non-current

ASPE: depends on what it is linked to

Question 40

breach of covenant/long term agreement

Answer 40

makes the liability due on demand at the B/S date, classified as current –> a new agreement must take place to reclassify as non-current

Question 41

Reverse liquidity format

Answer 41

show non-current before current

Question 42

Accounting errors

Answer 42

under IFRS: adjusted for at the earliest period affected by the change (retrospective with restatement) or simply adjust cumulative effects of the error on an opening B/S to reflect the cumulative effects of the change (modified retrospective approach)