The Classified Statement of Financial Position Flashcards
What are the 4 financial statements?
- The statement of financial position
- statement of income
- statement of changes in equity
- statement of cash flows
The statement of financial position presents what picture of a company?
A picture of a company’s financial position showing its assets, liabilities, and shareholders’ equity at a point in time
What do companies do to improve users’ understanding of a company’s financial position?
Group similar types of assets and similar types of liabilities together
In order, what standard classifications are under current assets on a classified statement of financial position?
- Cash
- Trading investments
- Accounts receivables
- Notes receivables
- Inventory
- Supplies
- Prepaid expenses
What order are assets in on a classified statement of financial position?
By liquidity
In order, what standard classifications are under non current assets on a classified statement of financial position?
- Long-term investments
- Property, plant, and equipment
- Intangible assets
- Goodwill
In order, what standard classifications are under current liabilities on a classified statement of financial position?
- Bank indebtedness
- Accounts payable
- Deferred revenue
- Notes payable
- Current portion of bank loan payable
In order, what standard classifications are under non-current liabilities on a classified statement of financial position?
- Notes payable
- Bank loan payable
In order, what standard classifications are under shareholder’s equity on a classified statement of financial position?
- Shared capital
- Retained earnings
What order are liabilities in on a classified statement of financial position?
Order of liquidity isn’t as important most are just listed as current
What 2 things do the classifications or groupings on the statement of financial position classifications help readers determine?
- Whether the company has enough assets to pay its liabilities or debts as they come due and
- The claims of short-term and long-term creditors on the company’s total assets
What are assets in a company?
Resources a company owns or controls that provide future economic benefits.
Why do assets provide future economic benefits?
Because they have the ability to generate cash flows for the company.
How can assets generate cash flows?
Directly (on their own) or indirectly (in combination with other assets).
What are current assets?
Assets whose benefits (converted into cash, sold, or used up) are realized within one year.
Within one year of the company’s financial statement date or its operating cycle, whichever is longer
What are non-current assets?
Assets whose benefits (converted into cash, sold, or used up) are realized over more than one year. Consist of all assets that are not current assets.
Within one year of the company’s financial statement date or its operating cycle, whichever is longer
What is the operating cycle?
Average period of time it takes for a business to pay cash to obtain products or services and then receive cash from customers for these products or services
How does the operating cycle work in a service business?
It includes performing services on account, paying employees, and collecting cash from customers.
What is the typical duration of an operating cycle for most businesses?
Up to one year.
Which businesses often have operating cycles longer than a year?
Vineyards, shipyards, and aircraft manufacturers.
What are 7 common types of current assets?
- Cash
- Trading investments
- Accounts receivable
- Notes receivable, including loans receivable
- Inventory
- Supplies
- Prepaid expenses
What does cash include as a current asset?
Cash on hand and cash deposited in banks or financial institutions.
What are trading investments?
Investments that are acquired principally for the purpose of selling in the near term
Give examples of trading investments. What is their purpose?
Investments in debt securities (e.g., bonds) or equity securities (e.g., shares) bought to resell after a short time to earn income from price fluctuations
What are accounts receivable?
Amounts owed by customers who purchased products or services on credit (on account).
What document often supports accounts receivable?
Sales invoices.
What are other types of receivables a company might have?
Amounts owed for interest, income tax, sales tax, rent, and similar items.
What are accrued receivables?
Receivables for amounts owed to the company that are estimated and lack supporting invoices.
What are notes receivables?
Amounts owed by customers or others that are normally interest-bearing and supported by a written promise to repay
What is a type of notes receivable?
Loans
What is the difference between notes receivables and accounts receivables?
Notes receivable normally bear interest, whereas accounts receivable do not, unless they are overdue.
What is inventory?
Goods held for sale to customers.
What are companies that sell inventory (often referred to as merchandise) directly to consumers called?
Retailers
What are supplies?
Consumable items used in running a business, such as office and cleaning supplies that are NOT for sale
What are examples of supplies?
Paper, printer toner, and pens
Why are supplies a current asset?
Because companies expect to use up these supplies within the year
What are prepaid expenses?
Costs paid in advance of use that benefit more than one accounting period. They are initially recorded as assets and become expenses only when they are used or consumed and no longer have future benefit.
Why are prepaid expenses current assets?
They are current assets because they reflect unused benefits such as office space and insurance coverage available for future use during the year
How do North American companies typically report current assets?
In order of liquidity, starting with the assets most easily converted into cash.
What is the exception to the order of liquidity in reporting current assets?
Companies in the real estate industry in Canada and some international companies list current assets in reverse order of liquidity.
What does liquidity refer to?
The ease with which an asset can be converted into cash.
What are cash equivalents?
Short-term, highly liquid investments with minimal risk that can be easily sold.
What are non-current assets also known as?
Long-term assets
What are the 5 common types of non-current assets?
- Long-term investments
- Property, plant, and equipment
- Intangible assets
- Goodwill
- Other assets
What are long term investments?
(Also known as investments) Investments in debt securities intended to be held for many years to earn interest, and equity securities of other companies held to generate investment income or held for strategic reasons.
What 2 things to long-term investments include?
- Multi-year investments in debt securities
- Equity securities of other companies
What are examples of long-term debt securities?
Loans, notes, bonds, and mortgages.
What are examples of long-term equity securities?
Shares of other companies held for investment income or strategic purposes.
Why are long-term investments classified as non-current assets?
They are not readily marketable or are not intended to be converted into cash within one year.
What is assumed if the term “investments” is used without a modifier?
It refers to non-current investments.
How does BlackBerry Limited classify its investments?
As long-term debt investments, such as U.S. treasury bills and other types of investments.
What is property, plant, and equipment?
Tangible assets, such as land, buildings, and equipment, with relatively long useful lives that are being used to operate the business
What are examples of property, plant, and equipment?
Land, buildings, equipment, furniture, and vehicles
What is a contra asset account?
An account that is offset against (reduces) another related asset account on the statement of financial position. Examples include allowance for doubtful accounts and accumulated depreciation.
How are property, plant, and equipment items listed on the statement of financial position?
In order of permanency, starting with land (indefinite life), followed by buildings, then equipment, and so on.
Why is land listed first in PPE?
Because it has an indefinite life.
What model do most companies use to record PPE?
The cost model, which records assets at their original purchase cost.
What is the revaluation model?
An alternative method where assets like PPE are recorded at their fair value.
How common is the revaluation model?
Some companies use this model to show land and buildings at their fair value, but most companies rarely use it.
What is depreciation?
The process of allocating the cost of a depreciable asset to expense over its useful life.
Why is PPE depreciated?
Because they provide benefits to companies over their useful lives
How do companies calculate depreciation?
By systematically assigning a portion of the asset’s cost to depreciation expense each year (rather than expensing the full cost in the year the company purchased the asset)
Why is land not depreciated?
Because it has an indefinite life and no determinable useful life.
How are depreciable assets presented on the statement of financial position?
Show the cost of the asset less its accumulated depreciation
How is accumulated depreciation shown on the statement of financial position?
As a contra asset account, subtracted from the cost of the related asset.
What is the carrying amount of a depreciable asset?
The cost of the asset minus its accumulated depreciation.
What are some alternate terminologies for carrying amount?
Net book value or book value
What are intangible assets?
Assets of a long-lived nature that do not have physical substance but represent a privilege or a right granted to, or held by, a company
Why are intangible assets classified as non-current?
Because they provide benefits over multiple years.
What do intangible assets typically represent?
A privilege or a right granted to, or held by, a company
What are examples of intangible assets?
Patents, copyrights, franchises, trademarks, trade names, and licences that give the company an exclusive right of use for a specified time
What industries often have significant intangible assets?
Technology, telecommunications, and entertainment industries.
What 2 groups are intangible assets divided into for accounting purposes?
- finite useful lives
- indefinite useful lives.
How are intangible assets with finite useful lives accounted for?
Their cost is allocated over their useful life through amortization.
What is amortization?
The process of allocating the cost of intangible assets with finite useful lives, basically depreciation but for intangible assets.
Do intangible assets with indefinite useful lives get amortized?
No, similar to how land with an indefinite life is not depreciated.
What term does IFRS recommend for allocating the cost of tangible assets over their useful life?
Depreciation for tangible assets and amortization for intangible assets with definite lives.
What term does ASPE recommend for allocating the cost of assets with definite lives?
Amortization for both tangible and intangible assets with definite lives.
Why might some companies use “depreciation” and “amortization” interchangeably?
Because some publicly traded companies apply both terms in similar contexts.
How does amortization differ from depreciation?
Amortization is used for intangible assets, while depreciation applies to tangible assets.
What is goodwill?
An asset that arises when a company pays more to acquire another company than the fair value of its net identifiable assets.
How is goodwill calculated?
By subtracting the fair value of the acquired company’s net identifiable assets from the purchase price.
What are net identifiable assets?
The fair value of a company’s assets minus the fair value of any liabilities assumed in the purchase.
Why is goodwill a residual amount?
Simply the difference between the price paid for the company and the fair value of the net identifiable assets acquired (fair value of assets acquired less fair value of any liabilities assumed)
What does goodwill represent?
The value of the business as a whole, including reputation, brand strength, and employee quality. Not attributable to any recorded asset or liability
How is goodwill similar to intangible assets?
It has no physical substance and generates future benefits.
How is goodwill different from other intangible assets?
It cannot be sold separately from the company, whereas intangible assets like patents or trademarks can.
Can goodwill be amortized?
No, because it has an indefinite life.
How is goodwill reported on financial statements?
Separately from other intangible assets.
What types of assets might not fit into standard classifications?
Non-current receivables, deferred income tax assets, and assets held for sale.
What is another term for deferred income tax?
Future income tax.
How do companies help financial statement users understand other assets?
By reporting them separately and providing details in explanatory notes.
What are liabilities?
Present obligations from past transactions that require transferring an economic resource.
When does a company record a liability?
When it is obligated to pay cash or provide goods/services due to a transaction.
What is an example of a liability?
A company receiving inventory and owing payment to the supplier.
How are liabilities classified?
As current (due within one year) or non-current (due after more than one year).
What are current liabilities?
Obligations that will be paid or settled within one year of the company’s financial statement date.
What are 5 common examples of current liabilities?
- Bank indebtedness
- Accounts payable
- Deferred revenue
- Notes payable, including bank loans payable
- Current portion of long-term debt (notes, bank loans, mortgages)
What is bank indebtedness?
A short-term loan, such as an operating line of credit, pre-arranged with a bank to cover cash shortfalls
What are accounts payable?
Amounts owed to suppliers for purchases made on credit (on account).
When does bank indebtedness typically occur?
When a company needs to borrow cash for short-term needs.
When are accounts payable recorded?
When an invoice is received from a supplier.
What are other types of payables a company might have?
Salaries, interest, sales tax, rent, income tax, and similar items.
How do other payables differ from accounts payable?
They often do not have an invoice and may require estimated amounts.
What are accrued payables?
Estimated amounts owed for expenses where no invoice is received.
What is deferred revenue?
A liability representing cash receipts from customers that have not yet met the criteria for revenue recognition.
Cash received from a customer before providing goods or services.
Why is deferred revenue recorded as a liability?
Because the company has an obligation to fulfill the service or deliver the goods in the future.
What is an example of deferred revenue?
Airlines receiving payments for tickets before passengers take their flights.
When is deferred revenue considered a current liability?
When the service or goods will be provided within one year.
When is deferred revenue considered a non-current liability?
When the service or goods will be provided after more than one year.
What are notes payable?
(Also known as loans payable) Amounts owed to suppliers, banks, or others that are normally interest-bearing and supported by a written promise to repay
What is current portion of long-term debt?
(Also known as current maturities of long-term debt) The portion of a non-current or long-term loan that is repayable within the current year.
How do notes payable differ from accounts payable?
Notes payable usually bear interest, while accounts payable do not unless overdue.
What is a bank loan payable?
A note payable specifically owed to a bank.
Are notes payable and loans payable the same?
Yes, they are often used interchangeably.
Can notes payable be both current and non-current?
Yes, depending on whether they are due within one year or beyond.
How do companies classify long-term loans on the balance sheet?
- The portion due within one year is a current liability.
- The remaining portion is a non-current liability.
What is another term for the current portion of long-term debt?
Current maturities of long-term debt.
How do North American companies typically list current liabilities?
In order of liquidity, based on their due dates.
Are companies required to follow a specific order for current liabilities?
No, many companies arrange them according to internal customs rather than a prescribed rule.
How do some real estate and international companies list liabilities?
In reverse order of liquidity.
Why do users of financial statements analyze the relationship between current assets and current liabilities?
This relationship is important in evaluating a company’s ability to pay its current liabilities.
What are non-current liabilities?
(Also known as long-term liabilities) Obligations that are not expected to be paid or settled within one year of the financial statement date.
What are 4 examples of common non-current liabilities?
- Notes payable, including bank loans payable, mortgages payable, and bonds payable
- Lease liabilities
- Pension and benefit obligations
- Deferred liabilities
When is a note payable classified as non-current?
When it matures after more than one year.
What are mortgages payable?
Similar to long-term notes but have property (such as land or a building) pledged as security for the loan
What are bonds payable?
Typically issued by large corporations and governments to borrow large sums of money, will often trade in active markets similar to shares
What are lease liabilities?
Obligations for future payments on long-term rental contracts for equipment or property.
What are pension and benefit obligations?
Amounts owed to past and current employees for retirement benefits.
What are deferred income tax liabilities?
Are a common example of a deferred liability. Income tax related to the current year’s net income that will be paid in a future period.
Why do deferred income tax liabilities arise?
Due to differences between accounting and tax treatment and represent income tax related to the current year’s net income that a company will likely pay in a subsequent period
What is an example of a deferred liability?
Deferred revenue if it will not be earned for more than a year.
How do companies disclose details about non-current liabilities?
Normally provide extensive notes to the financial statements that describe the nature and terms of the obligation and other relevant details
What is an example of a non-current (long-term) liability and notes that a company would provide with it?
Disclosure for a long-term mortgage payable would include the maturity date, interest rate, mortgage payments for the next five years, and the nature of any assets pledged as security to support the borrowing
What additional liability details does TELUS provide in its financial statements?
Information about legal claims, employee termination (severance costs), and obligations related to property, plant, and equipment.
What types of long-term debt does TELUS report?
Notes payable and debentures (similar to bonds).
What details does TELUS provide about its long-term debt?
Amounts, interest rates, and maturity dates.
What are TELUS’s other long-term liabilities?
Pensions, post-retirement benefits, and other items.
What is shareholders’ equity?
The residual amount, representing the difference between a company’s assets and its liabilities.
What are the two main components of shareholders’ equity?
Share capital and retained earnings.
Can there be other items included in shareholders’ equity?
Yes, such as accumulated other comprehensive income and contributed surplus.
What happens when shareholders purchase shares in a company?
They invest cash or other assets, and in return, the company issues ownership certificates in the form of shares (common or preferred).
What types of shares can a company issue?
Common shares and preferred shares.
How does a company classify the total of all shares issued?
As share capital, which includes both common and preferred shares.
Quite often, companies have only one class of shares, what is the title for them?
Simply common shares. International companies often call these ordinary shares.
What is another term for share capital?
Capital stock
What do retained earnings represent?
The cumulative amounts of net income that a company has retained over time.
Where are changes to share capital and retained earnings during the period reported?
On the statement of changes in equity.
Where are the ending balances of share capital and retained earnings determined on the statement of changes in equity reported?
In the shareholders’ equity section on the statement of financial position
What other items does CGI Group report in its shareholders’ equity section?
Contributed surplus and accumulated other comprehensive income.
What is contributed surplus?
Also known as additional contributed capital, represents amounts contributed by shareholders (other than from share capital) arising from certain types of equity transactions
What is accumulated other comprehensive income?
An account used to accumulate the company’s other comprehensive income that arises under IFRS as a result of complex items that are similar to revenues and expenses.
Do accounting standards prescribe the order in which companies should present items in the statement of financial position?
No, but the common order is in order of liquidity:
current assets (from most to least liquid)
current liabilities (order which payments are due, most to least current)
