Chapter 5 - Financial Position and Cash Flows

Question 1

What is a provision

Answer 1

A liability with an uncertain outcome.

Question 2

What are the three conditions for a provision?

Answer 2

1) There must be a present obligation based on a past event.
2) Outflow or economic resources is probable.
3) The company can estimate the amount

Question 3

What do we do if all three conditions are satisfied?

Answer 3

We will record a liability and an expense.

Question 4

What is a contingent liability?

Answer 4

A contingent liability is a when there is a present obligation but the company cannot measure this present obligation.

Question 5

What do we do if there is a contingent liability?

Answer 5

We will disclose it but we will not record anything.

Question 6

When term does ASPE use with respect to provisions and contingencies? What does the word mean?

Answer 6

It uses the word likely, not more likely than not or probable. Likely means that there is a higher probability than probable or most likely.

Question 7

True or False: Under ASPE, contingent liability and provision means the same thing?

Answer 7

True

Question 8

Under ASPE, when do we record a contingent liability?

Answer 8

When it is likely that a liability exists and we can estimate the value.

Question 9

Under ASPE, when do we not record an entry but disclose details?

Answer 9

When the liability is likely but we cannot estimate its value.

Question 10

What do we do under ASPE if likelihood is not determinable?

Answer 10

We will disclose notes in the financial statement.

Question 11

When do we not record an entry or a disclosure. What is the exception to this?

Answer 11

We will not record an entry or a note if it is unlikely to happen in the eyes of management. The only exception to this is if the lawsuit is so large it could bankrupt the company even if it is unlikely.

Question 12

What is a subsequent event?

Answer 12

A subsequent event is an event that happens after the statement of financial position date (year end) and the release of the financial statements 1-3 months after.

Question 13

When do we record a journal entry for a subsequent event?

Answer 13

We will record it if the subsequent event explains the conditions of the items in the statement of financial position at year end.

Question 14

When do we not record a journal entry for a subsequent event?

Answer 14

If the subsequent event explains the conditions after the financial statement year end date.

Question 15

What are examples of cash and cash equivalents?

Answer 15

Cash, Demand deposits and low risk liquid investments that are typically due within 90 days.

Question 16

What are the characteristics of cash equivalents?

Answer 16

1) We can convert them into cash within 90 days
2) Insignificant risk to a change in value
3) Typically they are combined with cash since they act just like cash.

Question 17

How do we determine the current and non-current portions of a bank loan?

Answer 17

The answer to that is it truly depends, however we can look towards the subsequent journal entries for a deeper understanding. Every year we will have a payment that must be done. This payment will determine the current and non-current portions of the bank loan. Let us say that a bank loan calls for a $1000 payment excluding interest, every year this will be the current portion of the loan, and the non-current will be the remaining balance. If however, the bank loan calls for 1000 payment including interest, we need to calculate the interest and deduct the interest by the payment date to determine what is current (so what will be paid), and what is not current will be paid in the future.

Question 18

What order are current assets typically listed in on the statement of financial position?

Answer 18

1) Cash
2) Short Term Investments
3) Accounts Receivable
4) Inventory
5) Prepaids

Question 19

What is the chronological list of the different sections of the statement of financial positions current assets?

Answer 19

1) Current Assets
2) Non-Current Investments
3) Property, Plant, and Equipment
4) Intangibles and Goodwill.