UNDERSTANDING OF FINANCIAL STATEMENTS

Question 1

• Means by which the information accumulated and processed in financial accounting.
• Periodically communicated to the users.
• The end product (main output) of the financial accounting process.

Answer 1

Financial statements

Question 2

What are the
COMPONENTS OF FINANCIAL STATEMENTS?(6)

Answer 2

1) Statement of Financial position (balance sheet)
2) Income statement
3) Statement of comprehensive income (statement of recognized gains and losses)
4) Statement of changes in equity
5) Statement of cash flows
6) Notes, comprising a summary of significant accounting policies and other explanatory notes

Question 3

What is the PURPOSE OF FINANCIAL STATEMENTS?

Answer 3

“to provide information about the financial position, performance and
cash flows of an entity that is useful to a wide range of users in making economic decisions.”

Question 4

Financial statements also show the results of the management’s stewardship of the resources entrusted to it. To meet the objective, financial statements provide information about an entity’s: (8)

Answer 4

1) Assets
2) Liabilities
3) Equity
4) Income and expenses, including gains and losses
7) Contributions by and distributions to owners in their capacity as owners
8) Cash flows

Question 5

Financial statements shall be presented at least __________.

Answer 5

Annually

Question 6

When an entity’s end of reporting period changes and
financial statements are presented for a period longer or shorter than one year, an entity shall disclose, in
addition to the period covered by the financial statements: (2)

Answer 6

1) Reason for using a longer or shorter period
2) Fact that amounts presented in the financial statements are not entirely comparable

Question 7

A formal statement showing the three elements, namely assets, liabilities and
equity.

Answer 7

STATEMENT OF FINANCIAL POSITION (balance sheet)

Question 8

Investors, creditors and other statement users analyze the __________ to evaluate such
factors as liquidity, solvency, financial structure and capacity for adaptation

Answer 8

STATEMENT OF FINANCIAL POSITION (balance sheet)

Question 9

resources controlled by the entity as a result of past transactions and events and from which future economic benefits are expected to flow to the entity.

Answer 9

ASSETS

Question 10

What are the Classifications of assets?(2)

Answer 10

1. Current Assets
2. Non-current assets

Question 11

Paragraph 66 of revised PAS 1 provides that an entity shall classify an asset as current when:

Answer 11

a) Asset is cash or cash equivalent unless the asset is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period
b) The entity holds the asset primarily for the purpose of trading
c) The entity expects to realize the asset within twelve months after the reporting period
d) The entity expects to realize the asset or intends to sell or consume it within the entity’s normal operating cycle

Question 12

An entity shall classify all other assets not classified as current as non-current. Included in the noncurrent assets are the following:

Answer 12

1) Property plant and equipment (fixed assets)
2) Long-term investments
3) Intangible assets
4) Other noncurrent assets

Question 13

PAS 1 provides that “when an entity presents current and noncurrent assets as separate classification on the face of the
statement of financial position, __________”

Answer 13

it shall NOT classify deferred tax assets as current assets

Question 14

present obligations of an entity arising from past transactions or events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

Answer 14

LIABILITIES

Question 15

[TRUE OR FALSE] It is not necessary that the entity liable must be identified.

Answer 15

FALSE. The liability is the present obligation of a particular entity – the entity liable must be identified. It is not necessary
that the payee or the entity to whom the obligation is owed be identified

Question 16

[TRUE OR FALSE] Liability arise from past transaction or event – liability is not recognized until it is incurred

Answer 16

TRUE

Question 17

What are the classifications of liabilities?

Answer 17

1. Current liabilities
2. Non-current liabilities

Question 18

Under PAS 1, as a minimum, the face of the statement of financial position shall include the following line items for current liabilities:
(5)

Answer 18

1. Trade and other payables
2. Current provisions
3. Short-term borrowings
4. Current portion of long term debt
5. Current tax liability

Question 19

Obligations which exist at the end of the reporting period although their amount is not definite.

Answer 19

Estimated liabilities

Question 20

A possible obligation that arises from past event and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.

Answer 20

Contingent liability

Question 21

A present obligation that arises from past event but is not recognized because it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation or the amount of the obligation cannot be measured reliably.

Answer 21

Contingent liability

Question 22

Future event is likely to happen

Answer 22

Probable Contingent liability

Question 23

What are the Types of contingent liability?
(3)

Answer 23

1) Probable
2) Possible
3) Remote

Question 24

Future event is less likely to happen

Answer 24

Possible Contingent liability

Question 25

Future event is least likely to happen

Answer 25

Remote Contingent liability

Question 26

What is the treatment for Possible Contingent liability?

Answer 26

no disclosure

Question 27

What is the treatment for Remote Contingent liability?

Answer 27

no disclosure

Question 28

What is the treatment for Probable Contingent liability whose amount can be measured reliably?

Answer 28

should be recognized as a provision (expense and an estimated liability is recorded)

Question 29

The residual interest in the assets after deducting all of its liabilities. It is increased by profitable
operations and contribution by owners. It is decreased by unprofitable operations and distributions to owners.

Answer 29

EQUITY (net assets)

Question 30

The residual interest of owners in the net assets of a corporation measured by the excess of assets over liabilities.

Answer 30

Shareholders’ equity (stockholders’ equity)

Question 31

Generally, it represents those items of equity other than the aggregate par or stated value of share capital and retained earnings unappropriated.

Answer 31

Reserves

Question 32

Specifically, reserves include the following:
(5)

Answer 32

a) Share premium reserves (additional paid in capital)
b) Appropriation reserves (retained earnings appropriated)
c) Asset revaluation reserve (revaluation surplus)
d) Foreign currency translation reserve (accumulated translation gain or loss)
e) Equity contra reserve (e.g. cumulative unrealized loss on available for sale securities)

Question 33

used to report information that does not fit into the body of the statements in order to enhance the understandability of the statements. It contain information in addition to that presented in the statement of financial position, income statement, statement of comprehensive income, statement of changes in equity and statement of cash flows. It provide narrative description or disaggregation of items presented in the financial statements and information about items that do not qualify for recognition.

Answer 33

NOTES TO FINANCIAL STATEMENTS

Question 34

What are the FORMS OF STATEMENT OF FINANCIAL POSITION?
(2)

Answer 34

1. Report form
2. Account form

Question 35

this form set forth the three major sections in a downward sequence of assets, liabilities and equity

Answer 35

Report form

Question 36

the assets are shown
on the left side and the liabilities and equity on the right side of the financial positio

Question 37

includes the components of net income or loss and the components of other comprehensive income during the period.

Answer 37

COMPREHENSIVE INCOME

Question 38

income and expenses that are recognized in profit or loss

Answer 38

Components of net income (loss)

Question 39

comprises items of income and expenses that are not recognized in profit or loss but are recognized directly in equity as required or permitted by accounting standards.

Answer 39

Other comprehensive income

Question 40

examples of components of
other comprehensive income are:
(4)

Answer 40

a. Unrealized gains and losses on available for sale financial assets
b. Gains and losses arising from translating the financial statements of a foreign operation
c. Changes in revaluation surplus
d. The effective portion of gains and losses on hedging instruments in a cash flow hedge. (e.g. unrealized gain or
loss on interest swap, forward contract, futures contract and option)

Question 41

The entity has two options of presenting comprehensive income, namely:

Answer 41

1. Two statements, (1)An income statement showing the components of income and expenses that are recognized in profits or loss; (2)Statement of comprehensive income beginning with the net income or loss as shown in the income statement plus or minus the components of other comprehensive income
2. A single statement of comprehensive income showing all components of net income or loss and all components of
   other comprehensive income. this single statement is a combined income statement and statement of comprehensive
   income

Question 42

the conventional (traditional) preparation of income statement in conformity with GAAP. This requires the determination of how much income was earned during the year and how much expense is incurred in earning the revenue. the difference between the income and the expense is net income or net loss. It is the direct result of the application of the principle of matching costs with revenue that is why, this procedure is called MATCHING
APPROACH.

Answer 42

TRANSACTION APPROACH

Question 43

Sources of income:
(4)

Answer 43

a) Sales of merchandise to customers
b) Rendering of services
c) Use of entity resources
d) Disposal resources other than products

Question 44

income from sales should include all sales to customers during the period. Sales returns, allowances and discounts should be deducted from gross sales to arrive at net sales

Answer 44

Sales of merchandise to customers

Question 45

income from rendering of services, among others, includes professional fees, media advertising commissions, insurance agency commissions, admission fees for artistic performance and tuition fees

Answer 45

Rendering of services

Question 46

includes interest, rent, royalty and dividend income

Answer 46

Use of entity resources

Question 47

examples include gain on sale of investments, gain on sale of property, plant and equipment and gain on sale of intangible assets

Answer 47

Disposal resources other than products

Question 48

Components of expense:
(5)

Answer 48

a) Cost of sales
b) Distribution costs or selling expenses
c) Administrative expenses
d) Other expenses
e) Income tax expense

Question 49

PAS 1 specifically mandates that “an entity shall not present any items of income and expense as _____”

Answer 49

extraordinary items, either on the face of the income statement or statement of comprehensive income or in the notes.

Question 50

UNUSUAL and INFREQUENT items of income and expense are now considered __________

Answer 50

component of income from continuing operations.

Question 51

PAS 1 provides that an entity shall present an analysis of expenses recognized in profit or loss using a classification
based on either the __________ or their __________, whichever provides information that is reliable and more relevant.

Answer 51

the FUNCTION of expense or their NATURE within the entity

Question 52

classifies expenses according to their function as part of cost of
sales, selling activities, administrative activities and other activities.

Answer 52

Functional presentation (cost of sales method)

Question 53

expenses are aggregated according to their nature and not allocated among the various
functions within the entity.

Answer 53

Natural presentation

Question 54

shows the changes affecting directly the retained earnings of an entity and relates the income statement to the statement of financial position.

Answer 54

STATEMENT OF RETAINED EARNINGS

Question 55

it is a basic statement that shows the movements in the elements or components of the shareholders’ equity.

Answer 55

STATEMENT OF CHANGES IN EQUITY

Question 56

An entity shall present a statement of changes in equity showing the following:
(4)

Answer 56

a) Total comprehensive income for the period
b) For each component of equity, the effects of changes in accounting policies and correction of errors
c) The amounts of transactions with owners in their capacity as owners, showing separately contributions by and distributions to owners
d) For each component of equity, a reconciliation between the carrying amount at the beginning and end of the period, separately disclosing each change.

Question 57

it is a basic component of the financial statements which summarizes the operating, investing and financing activities of an entity. It provides information about the cash receipts and cash payments of an entity during a period.

Answer 57

STATEMENT OF CASH FLOWS