Study Unit 2: Financial Statements

Question 1

What are current assets?

Answer 1

CashInventory or Assets expected to be converted or consumed during a business’ operating cycleDeferred Gross Profit on Installment Sales (Contra Asset)Receivables expected to be collected in 12 months or less

Question 2

What are current liabilities?

Answer 2

Liabilities that will use current assets during the present operating cycle

Question 3

What is an accrued liability?

Answer 3

Expense that has been incurred but not paidExample: rents payable

Question 4

What is an operating cycle?

Answer 4

Average time it takes to turn materials or services into Cash

Question 5

What is the primary use of Financial Statements?

Answer 5

The primary method of communicating to external parties information about the entity’s results of operations, financial position, and cash flows.

Question 6

What are the main elements to building a financial statement according to GAAP?

Answer 6

1) Statement of Financial Position (Balance Sheet) -Assets -Liabilities -Equity -Investments to the owners -Distributions to the owners2) Statement of Earnings (Income Statement) - Revenues -Gains -Expenses -Losses3) Statement of Comprehensive Income4) Statement of Investments by and Distributions to Owners

Question 7

What are the main elements to building a financial statement according to IFRS?

Answer 7

1) Assets2) Liabilities3) Equity4) Income (includes revenues and gains5) Expenses (including losses

Question 8

What changes to the Assets and Liabilities that DO NOT change Equity?

Answer 8

1) Asset exchanges2) Liability exchanges3) Receipt of goods or services w/ incurrence of payables4) Settlement of payables with assets

Question 9

What changes to the Assets and Liabilities that DO change Equity?

Answer 9

1) Comprehensive Income - Revenues - Expenses -Gains -Losses2) Transfers between Entity and Owners -Investments by owners -Distributions to owners

Question 10

What changes to Equity that DO NOT change Assets and Liabilities ?

Answer 10

1) Declaration and distribution of stock dividends2) Conversion of preferred stock

Question 11

Define Balance Sheet

Answer 11

The statement of financial position reports the assets, liabilities, equity, and their relationships at a MOMENT in TIME. IT helps users to assess liquidity, financial flexibility, profitability, and risk.

Question 12

Define Current Assets

Answer 12

Cash and other assets or resources commonly identified as reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the buiness

Question 13

Define Current Liabilities

Answer 13

Obligations whose liquidation is reasonably expected to require the use of existing resources properly as current assets, or the creation of other current liabilities.

Question 14

What items are classified as current assets?

Answer 14

1) Cash and Cash Equivalents2) Certain individual Trading, Available of sale, and held-to-maturity securities3) Receivables4) Inventories5) Prepaid Expenses

Question 15

What items are classified as Noncurrent assets?

Answer 15

1) Certain investments and funds -securities held LONGER than 1 Year -Funds restricted -Cash surrender value of life insurance policy -Capital assets NOT in current use2) Plant, Property, & Equipment3) Intangible assets4)Other noncurrent assets

Question 16

What items are classified as current Liabilities?

Answer 16

1) Trade payables2) Other Payables3) Unearned Revenue4) Other obligations expected to be liquidated

Question 17

What items are NOT classified as current Liabilities?

Answer 17

1) Current obligations if an entity (a) intends to refinance them on a NONCURRENT basis and (b) demonstrates an ability to do so2) Dividends not yet declared3) Debts to be paid from funds accumulated in noncurrent assets account

Question 18

The ability to refinance a debt may be demonstrated by?

Answer 18

1) Enter into a financing agreement meeting all conditions BEFORE the balance sheet is issued2) Issuing a noncurrent obligation or equity securities AFTER the end of the reporting period BUT before issuance of the balance sheet

Question 19

How does IFRS classify a liability that is due to be settled within 12 months?

Answer 19

Financial liabilities due to be settled within 12 months should CONTINUE to be classified as CURRENT. This applies even if (1) the original term exceeded 12mths and (2) an agreement to refinance or reschedule payments on a noncurrent basis is completed AFTER the reporting period and BEFORE the financial statements are authorized for issue.

Question 20

What items are classified as Noncurrent Liabilities?

Answer 20

1) Noncurrent Notes and Bonds2) Liabilities under Capital Leases3) Most postretirement benefit obligations4) Deferred tax liabilities arising from interperiod tax allocation5) Obligations under product or service warranty agreements6) Advances for noncurrent commitments to provide goods or services7) Advances for affiliated entities8) Deferred Revenue

Question 21

Define Equity

Answer 21

The residual after total liabilities are subtracted from total assets.(Any recognized transaction that does NOT have equal and offsetting effects on total assets and total liabilities changes equity)

Question 22

What items are classified under the equity section?

Answer 22

1) Captial contributed by owners (par value of c/s & p/s issued and APIC)2) Retained Earnings (income reivested)3) Accumulated other comprehensive income 4) The noncontrolling interest in a consolidated entityLess5) Treasury Stock

Question 23

Define the purpose of an Income Statment

Answer 23

The results of operations are reported in the income statement on the accrual basis using an approach oriented to historical transactions. Revenues - Expenses + Gains - Losses = Net Income (loss)

Question 24

What are the 3 formats of the income statement and their purpose?

Answer 24

1) Single Step - provides one grouping for revenues/gains and one grouping for expenses/losses2) Multiple-step - matches operating revenues and expenses in a section separate from nonoperating items. 3) Condensed - Common method b/c it includes only the section totals of the multiple-step format.

Question 25

How is the COGS calculated?

Answer 25

Beginning FG inventory+ Purchases or COGM= Goods Available for Sale-Ending FG Inventory= COGS

Question 26

What are the 2 ways to calculate COGM?

Answer 26

Beginning WIP+ Sum of periodic manufacturing costs- Ending WIP= COGM orEnding FG Inventory+ COGS- Beginning FG inventory= COGM

Question 27

What is comprehensive income?

Answer 27

Includes all changes in equity of a business during a period EXCEPT those from invests by and distributions to owners.Net Income + OCI = Comprehensive income

Question 28

What are some items classified as Other Comprehensive income?

Answer 28

1) Unrealized gains/losses on AFS (except those that are hedged items in a F.V hedge)2) Gains/Losses on derivatives 3) Certain amounts w/ recognition of funded status of postretirement defined benefits plans4) Certain foreign currency items

Question 29

What are some transactions that effect retained earnings and result in adjustments?

Answer 29

1) Net income/loss for the period2) Any prior-period adjustments, net of tax3) Dividends declared4) Certain other rare items

Question 30

Define Cash Basis of reporting

Answer 30

Revenues and expenses are recognized when CASH is received or paid, regardless of when goods are delivered or received or when services are rendered,

Question 31

Modified Cash Basis

Answer 31

Uses the cash basis for typical operating activities with modifications having substantial supportExamples: reporting inventory, accruing income taxes, and capitalizing and depreciating fixed assets

Question 32

What are some examples of other bases of Accounting

Answer 32

1) Cash Basis2) A basis used to comply w/ requirements of a regulator3) Basis used for tax purposes

Question 33

Which Personal Financial Statements are required?

Answer 33

Statement of Financial Condition & Statement of Changes in Net Worth

Question 34

How are assets and liabilities valued in a Personal Financial Statement?

Answer 34

Estimated current value

Question 35

How are estimated taxes that would be paid if all assets were converted into cash and all liabilities paid presented on a Personal Financial Statement?

Answer 35

Presented on Statement of Financial Condition between Liabilities and Net Worth

Question 36

What is the general presentation on a statement of financial condition?

Answer 36

Assets - Liabilities - Estimated taxes on assets sold: Net Worth

Question 37

How is life insurance presented on a Personal Financial Statement?

Answer 37

Only shown if there is cash surrender valueIt is shown net of loans against the policy

Question 38

How are business interests shown on a Personal Financial Statement?

Answer 38

Business Interests that constitute a large percentage of total assets should be separated from other investments

Question 39

What is the discreet view in an Interim Financial Statement?

Answer 39

Interim period is a separate accounting period - not GAAPSame accounting principles used for annual reporting should be used.