Chapter 9 - Financial Statements

Question 1

ASPE, which is based on the
traditional Canadian accounting standards, is often referred to as

Answer 1

GAAP.

Question 2

Private enterprises are allowed to choose between ASPE or IFRS, but most tend to favour ___ standards and practices

Answer 2

ASPE

Question 3

excess of current assets over current liabilities represents the company’s ___

Answer 3

working capital

Question 4

Deferred charges represent ___ that are considered assets

Answer 4

previously incurred costs

Question 5

deferred charges examples (4):

Answer 5

• Research and development expenses
• Software development expenses
• Process redesign project costs
• Start-up costs

Question 6

Retained earnings may be earmarked for special purposes, in which event they cannot be distributed as dividends.
A ___ is then created, representing that portion of retained earnings set aside temporarily or permanently for specific use.

Answer 6

reserve

Question 7

foreign currency Gains are presented directly under ___ , and losses from foreign
currency translations are presented under___

Answer 7

shareholders’ equity
other assets

Question 8

Net income for corporations always takes income taxes into account because ___

Answer 8

the corporation is responsible for its own tax liability

Question 9

For proprietorships and partnerships, on the other hand, net income is always presented before taxes, because

Answer 9

The proprietor or partners are responsible for paying taxes individually.

Question 10

cash assets must mature within ___ and
their value at maturity must be known

Answer 10

three months

Question 11

Income tax cash flows are classified as

Answer 11

operating activities

Question 12

Cash flows related to operating activities may be presented ___ or ___

Answer 12

directly
indirectly

Question 13

Presentation using the direct method

Answer 13

transforms each income statement item calculated on the accrual basis into
an amount calculated on the cash basis

Question 14

the indirect method illustrates

Answer 14

net income, as presented in the income statement

Question 15

The main financing activities are as follows: (6)

Answer 15

• Short- and long-term loans
• Loan repayments
• Share issues
• Purchases or redemptions of company stock
• Amounts paid under capital leases
• Dividends paid to shareholders

Question 16

The main investment activities include: (4)

Answer 16

• The acquisition and sale of fixed assets
• The capitalization of development and other similar expenses
• The acquisition and sale of investments (other than those considered cash equivalents)
• Cash advances and loans, and the repayment of same

Question 17

The limitations inherent in financial statements are due mainly to the choices made with respect to various underlying principles: (5)

Answer 17

the historical cost convention
conservatism
substance over form
materiality
measurement

Question 18

historical cost convention

Answer 18

The firm’s assets must be recorded on the balance sheet at their original cost, and this figure should not be modified thereafter

Question 19

conservatism principle

Answer 19

avoid overly optimistic financial statement estimates

Question 20

substance over form

Answer 20

Company operations as presented in the financial statements reflect economic and financial reality rather than legal form (example, company leasing building. does not own it but since financing it, include value in balance sheet)

Question 21

Materiality

Answer 21

An item is material if it is probable that its omission or misstatement would influence or change a decision of the user of the financial statements

Question 22

Materiality comes into play at three distinct levels:

Answer 22

• The precision or accuracy of the data presented
• The amount of detail in the financial statements
• The nature and extent of supplementary disclosures

Question 23

The financial statements and notes contain a significant amount of information. Responsibility for this information falls primarily to ___

Answer 23

the firm’s managers

Question 24

___, ___, ___ constitute three distinct engagements

Answer 24

Auditing, review, and compilation

Question 25

Auditing

Answer 25

produces the highest degree of assurance: the auditor’s report is made following systematic data gathering conducted in accordance with rigorous standards and procedures, with a view to substantiating each major item in the financial statements.

Question 26

Review

Answer 26

• iInvolves a lesser degree of certainty. Accountants obtain and examine information from management and, unless such information appears implausible, it is accepted.

Question 27

• Compilation

Answer 27

aimed at making data accessible to readers in the appropriate form.

Question 28

The ___ has been created in an effort to ensure that the most relevant information is
conveyed to the users of the auditor report

Answer 28

enhanced auditor’s report

Question 29

objective in an audit

Answer 29

to express an opinion on the financial
statements

Question 30

Objective of a review,

Answer 30

to determine whether the financial statements are plausible in the
circumstances.

Question 31

Deferred taxes result from temporary timing differences, the most common of which arise from differences between ___ and ___ for tax purposes

Answer 31

fixed-asset book depreciation
capital cost allowances

Question 32

The contributed surplus is generally related to operations on shareholders’ equity, in particular the ___

Answer 32

redemption by the firm of its own shares

Question 33

allocating ___ to a reserve has no impact on cash assets or
income.

Answer 33

retained earnings

Question 34

The following amounts result from transactions and other events that enter into the calculation of net income: (3)

Answer 34

• Cash inflows from the sale of assets and delivery of services
• Cash outflows for the payment of goods and services from suppliers and wages and other forms of compensation to employees
• Cash flows related to income taxes (unless the latter can be specifically associated with financing or investment activities)

Question 35

Valuation of assets at their fair value, although less objective, may be an appropriate solution in certain cases: (3)

Answer 35

• Finished-product inventories: estimated selling price, less sales-related costs.
• Raw-material inventories, machinery, and equipment valued at replacement cost.
• Value of fixed assets determined by appraisal.