Unit 1: General Features of Financial Statements
PRETEST
What are the components of the financial statements and provide brief description in each
component and its use?
1.
The following are the components of financial statements:
Statement of Financial Position is also known as Balance Sheet it shows the financial
condition of the entity. It comprises of assets, liabilities and equity in a certain date. It
helps primary users in making economic decision in assessing the financial data as to the
solvency, liquidity and the need of additional financing of the entity.
2.
Income Statement is a statement pertaining to the revenue less expenses. This statement
shows the financial performance of the entity.
3.
Statement of Comprehensive Income, together with the income statement
comprehensive income also shows the financial performance of the entity it comprises
gains and losses as well the reclassification items not recognized in income statement or
statement of profit and loss.
4.
Statement of Changes in Equity, this portrays the changes in the elements of
shareholder’s equity. From the word itself, equity is the residual interest in asset after
deducting all the liabilities.
5.
Statement of Cash Flows, this statement shows the utilization of cash and cash
equivalents during the period. It is presented according to the following classifications;
operating, investing and financing activities.
6. Notes to Financial Statement, this provides necessary disclosures required by the PFRS.
This provides information and disaggregation of items presented in other financial
statements and information about items that do not qualify for recognition but are
essential to the understanding of the financial statement for the users analysis.
ASSESSMENT
ACTIVITY 1
1. The components of the financial statement include all of the following, except
a. Statement of financial position
b. Income Statement
c. Statement of cash flows
d. Statement of retained earnings
2. Which of the following best describes “financial position”?
a. The income, the expenses and net income or loss for a period.
b. The assets, liabilities and equity at a particular moment in time.
c. The financial assets minus financial liabilities.
d. The total assets of an entity.
3. Statement of financial position is useful for all of the following, except
a. Assessing risk
b. Evaluating liquidity
c. Evaluating financial flexibility
d. Determining free cash flows
4. The statement of financial position
a. Omits many items are financial value.
b. Makes very limited use of judgment and estimate.
c. Uses fair value for most assets and liabilities.
d. All of these are correct regarding the statement of financial position
5. One criticism not normally aimed at a statement of financial position is
a. Failure to reflect current value information.
b. The extensive use of separate classification.
c. The extensive use of estimate.
d. Failure to include items of financial value that cannot be recorded objectively.
6. An entity shall present
a. The statement of cash flows more prominently than other statements.
b. The statement of financial position more prominently than other statements.
c. The statement of comprehensive income more prominently than other
statement.
d. Each financial statement with equal prominence.
7. Items of dissimilar nature or function
a. Must always be presented separately in financial statements.
b. Must not be presented separately in financial statements.
c. Must be presented separately in financial statement if material.
d. Must be presented separately in financial statement even if immaterial.
8. The basis of classifying assets as current or noncurrent is the period of time normally
required to convert cash invested in
a. Inventory back into cash, or 12 months, w/c ever is shorter.
b. Receivables back into cash, or 12 months, w/c ever is longer.
c. Tangibles fixed assets back into cash, or 12 months w/c ever is longer.
d. Inventory back into cash, or 12 months, w/c ever is longer.
9. Under the IFRS the correct order to present current assets is
a. Cash, accounts receivable, prepaid expenses, inventories.
b. Inventories, accounts receivable, prepaid expenses, cash.
c. Cash, inventories, accounts receivable, prepaid items.
d. Inventories, prepaid items, account receivable, cash.
10. The entity shall classify a liability as current under all of the following conditions,
except
a. The entity expects to settle the liability w/in normal operating cycle.
b. The entity holds the liability primarily for the purpose of trading.
c. The liability is due to be settled w/in 12 months after the reporting period
d. The entity has an unconditional right to defer settlement of the liability for at
least 12 months after the reporting period.
11. The presentation and classification of items shall be retained from one period to the
next.
a. Consistency of presentation
b. Materiality
c. Aggregation
d. Comparability
12. In presenting statement of financial position, an entity
a. Must make the current and noncurrent presentation
b. Must present assets and liabilities in order of liquidity
c. Must choose either the current and noncurrent or the liquidity presentation
d. Must make the current and noncurrent presentation except when a
presentation based on liquidity provides information that is reliable and more
relevant.
13. Current and noncurrent presentation provides useful information when the entity
a. Supplies goods or services w/in a clearly identifiable operating cycle
b. Is a financial information
c. Is a public utility
d. Is a non-profit organization
14. A presentation of assets and liabilities in increasing or decreasing order of liquidity
provides information that is reliable and more relevant than a current and noncurrent
information.
a. Financial institution
b. Public utility
c. Government-owned entity
d. Service provider
15. When there is much variability, the operating cycle is measured at
a. Six months
b. The median value
c. 12 months
d. Less than 12 months
16. Under the International Financial Reporting Standard, notes to financial statements
a. Must be quantifiable
b. Must qualify as an element
c. Amplify or explain items presented in the main body of the FS
d. All of the choices are correct regarding notes to FS.
17. What is the first item presented in the Notes to FS?
a. Statement of compliance w/ PFRS
b. Summary of significant accounting policies
c. Supporting information for items presented in the FS
d. Other disclosures, including contingent liabilities, unrecognized contractual
and nonfinancial disclosures
18. The presentation of notes to FS in a systematic manner
a. Is voluntary
b. Is mandatory
c. Is mandatory, as far as practicable
d. Depends on the industry
19. W/c of the following is not a method of disclosing pertinent information?
a. Supporting schedule
b. Parenthetical explanation
c. Cross reference and contra items
d. All of these are the methods of disclosing pertinent information
20. Adjusting events are those that
a. Provide evidence or conditions that existed at the end of the reporting period.
b. Are indicative of conditions that arose after the end of the reporting period.
c. Are indicative of conditions that arose before the end of the reporting period.
d. Provide evidence or conditions that existed after the date the FS were issued.
21. W/c of the following events after reporting period would require adjustment?
a. Loss of plant as a result of fire
b. Decline in the value of investment
c. Loss on inventory due to major flood loss
d. Loss on lawsuit the outcome of which was deemed uncertain at year-end.
22. All of the following fall w/in the definition of an entity’s related party, except
a. Joint venture in w/c the entity is a venturer.
b. A postemployment benefit plan for the benefit of the employees of the entity.
c. An executive director of the entity.
d. The partner of a key manager is major supplier of the entity.
23. Which of the following would not be considered key management personnel
compensation?
a. Short-term benefits
b. Share-based payments
c. Termination benefits
d. Reimbursement of “out of pocket” expenses
24. Close family members of an individual include all of the following, except
a. The individual’s spouse and children
b. Children of the individual’s spouse
c. Dependents of the individual or the individual’s spouse
d. Brother or sister of the individual
25. All of the following events after the reporting period should be classified as nonadjusting, except
a. The entity announced the discontinuance of assembly operation.
b. The entity entered into an agreement to purchase the leased building.
c. Destruction of a major production plant by fire.
d. A mistake in the calculation of allowance for uncollectible accounts receivable.
26. “Fair presentation” requires an entity (choose the incorrect one)
a. To comply with applicable PFRS.
b. To present information, including accounting policies, in a manner that
provides relevant, reliable, comparable and understandable information.
c. To provide additional disclosures when compliance with the specific
requirements in PFRS is insufficient to enable users to understand the impact of
particular transactions, other events anr1 conditions on the entity’s financial
position and financial performance.
d. To rectify inappropriate accounting policies used either by disclosure or by
note or explanatory material.
27. Items of dissimilar nature or function
a. Must always be presented separately in financial statements
b. Must not be presented separately in financial statements
c. Must be presented separately in financial statements if those items are
material
d. Must be presented separately in financial statements even if those items are
immaterial
28. Which statement is incorrect concerning the rule on “offsetting”?
a. An entity shall not offset assets and liabilities, and income and expenses,
unless required or permitted by PFRS.
b. Measuring assets net of valuation allowance is offsetting.
c. Gains and losses on disposal of noncurrent assets are reported by deducting
the proceeds on disposal the carrying amount of the asset and related selling
expenses.
e. Gains and losses arising from a group of similar transactions are reported on a
net basis, for example, foreign exchange gains and losses arising from financial
instruments held for trading
29. An entity shall present a complete set of financial statements, including comparative
information, at least annually. When an entity changes the end of its reporting period
longer or shorter than one year, an entity shall disclose all of the following, except
a. Period covered by the financial statements.
b. The reason for using a longer or shorter period.
c. The fact that amounts presented in the financial statements are not entirely
comparable.
d. The fact that similar entities in the geographical area in which the entity
operates have done so in the current year.
30. An entity must disclose comparative information for
a. The previous comparable period for all amounts reported.
b. The previous comparable period for all amounts reported and for all narrative
and descriptive information,
c. The previous comparable period for all amounts reported, and for all narrative
and descriptive information when it is relevant to an understanding of the current
period’s financial statements.
d. The previous two comparable periods for all amounts reported.