CHAPTER 5
STATEMENT OF FINANCIAL POSITION AND
STATEMENT OF CASH FLOWS
CHAPTER LEARNING OBJECTIVES
1. Explain the uses and limitations of a statement of financial position. 2. Identify the major classifications of the statement of financial position.
3. Prepare a classified statement of financial position using the report and account formats. 4. Indicate the purpose of the statement of cash flows.
5. Identify the content of the statement of cash flows. 6. Prepare a basic statement of cash flows.
7. Understand the usefulness of the statement of cash flows. 8. Determine additional information requiring note disclosure.
9. Describe the major disclosure techniques for financial statements. *10. Identify the major types of financial ratios and what they measure. * This information can be found in an Appendix to the chapter
TRUE FALSE
—Conceptual
1. Liquidity refers to the ability of an enterprise to pay its debts as they mature.
2. The statement of financial position omits many items that are of financial value to the business but cannot be recorded objectively.
3. Financial flexibility measures the ability of an enterprise to take effective actions to alter the amounts and timing of cash flows.
4. Under IFRS the statement of financial position is often referred to as the statement of changes in equity.
5. Companies frequently describe the terms of all long-term liability agreements in notes to the financial statements.
6. An asset which is expected to be converted into cash, sold, or consumed within one year of the statement date is always reported as a current asset.
7. Land held for speculation is reported in the property, plant, and equipment section of the statement of financial position.
8. Under IFRS a company may use the term “reserve” to include items such as retained earnings, share premium, and accumulated other comprehensive income.
9. On the statement of financial position the non-controlling interest account is reported as a long-term investment.
10. The equity section of an IFRS statement of financial position includes share capital, share premium, and retained earnings in that order.
11. The account form and the report form of the statement of financial position are both acceptable under IFRS.
12. The primary purpose of a statement of cash flows is to report the cash effects of operations during a period.
13. The statement of cash flows reports only the cash effects of operations during a period and financing transactions.
14. Financial flexibility is a company’s ability to respond and adapt to financial adversity and unexpected needs and opportunities.
15. Collection of a loan is reported as an investing activity in the statement of cash flows.
16. Under IFRS the payment of dividends may be reported as either an investing activity or a financing activity.
17. Companies determine cash provided by operating activities by converting net income on an accrual basis to a cash basis.
18. Significant financing and investing activities that do not affect cash are not reported in the statement of cash flows or any other place.
19. Under IFRS non-cash activities are reported as either investing or financing activities in the body of the statement of cash flows.
20. Financial statement readers often assess liquidity by using current cash debt coverage. 21. Free cash flow is net income less capital expenditures and dividends.
22. The IASB recommends disclosure for all significant accounting principles and methods that involve selection from among alternatives.
23. Companies present a “Summary of Significant Accounting Policies” generally as the first note to the financial statements.
24. IFRS requires that a complete set of financial statements be presented annually and that for comparative purposes, companies must include three complete sets of financial statements and related notes.
25. IFRS requires specific note disclosures on inventories that are disaggregated into classifications such as merchandise, production supplies, work in process, and finished goods.
26. Companies may use parenthetical explanations, notes, cross references, and supporting schedules to disclose pertinent information.
27. The accounting profession has recommended that companies use the word reserve only to describe amounts deducted from assets.
28. On the statement of financial position, an adjunct account reduces either an asset, a liability, or an equity account.
29. Under IFRS, companies may offset assets and liabilities; for example, accounts payable may be offset against cash to report net cash available for other expenses.
30. Under IFRS an adjunct account on the statement of financial position increases an asset, liability, or equity account.
True False Answers—
ConceptualItem Ans. Item Ans. Item Ans. Item Ans. Item Ans.
1. F 7. F 13. F 19. F 25. T 2. T 8. T 14. T 20. T 26. T 3. T 9. F 15. T 21. F 27. F 4. F 10. T 16. F 22. T 28. F 5. T 11. T 17. T 23. T 29. F 6. F 12. F 18. F 24. F 30. T
MULTIPLE CHOICE
—Conceptual
31. Which of the following is a limitation of the statement of financial position? a. Many items that are of financial value are omitted.
b. Judgments and estimates are used. c. Current fair value is not reported. d. All of these choices are correct.
32. The statement of financial position is useful for analyzing all of the following except a. liquidity.
b. solvency. c. profitability. d. financial flexibility.
33. Statement of financial position information is useful for all of the following except to a. compute rates of return
b. analyze cash inflows and outflows for the period c. evaluate capital structure
d. assess future cash flows
34. Statement of financial position information is useful for all of the following except a. assessing a company's risk
b. evaluating a company's liquidity
c. evaluating a company's financial flexibility d. determining free cash flows.
35. A limitation of the balance sheet that is not also a limitation of the income statement is a. the use of judgments and estimates
b. omitted items
c. the numbers are affected by the accounting methods employed d. valuation of items at historical cost
S36. The statement of financial position contributes to financial reporting by providing a basis
for all of the following except a. computing rates of return.
b. evaluating the capital structure of the enterprise. c. determining the increase in cash due to operations.
d. assessing the liquidity and financial flexibility of the enterprise.
S37. One criticism not normally aimed at a statement of financial position prepared using
current accounting and reporting standards is a. failure to reflect current value information. b. the extensive use of separate classifications. c. an extensive use of estimates.
P38. The amount of time that is expected to elapse until an asset is realized or otherwise
converted into cash is referred to as a. solvency.
b. financial flexibility. c. liquidity.
d. exchangeability.
39. The statement of financial position
a. Omits many items that are of financial value.
b. Makes very limited use of judgments and estimates. c. Uses fair value for most assets and liabilities.
d. All of the choices are correct regarding the statement of financial position. 40. The statement of financial position can help assess all of the following except
a. Solvency.
b. Financial flexibility. c. Profitability.
d. Liquidity.
41. The net assets of a business are equal to a. current assets minus current liabilities. b. total assets plus total liabilities.
c. total assets minus total shareholders' equity. d. none of these choices are correct.
42. The correct order to present current assets is
a. cash, accounts receivable, prepaid items, inventories. b. inventories, receivables, prepaid items, cash.
c. cash, inventories, accounts receivable, prepaid items. d. inventories, prepaid items, accounts receivable, cash.
43. The basis for classifying assets as current or noncurrent is conversion to cash within a. the accounting cycle or one year, whichever is shorter.
b. the operating cycle or one year, whichever is longer. c. the accounting cycle or one year, whichever is longer. d. the operating cycle or one year, whichever is shorter.
44. The basis for classifying assets as current or noncurrent is the period of time normally required by the accounting entity to convert cash invested in
a. inventory back into cash, or 12 months, whichever is shorter. b. receivables back into cash, or 12 months, whichever is longer.
c. tangible fixed assets back into cash, or 12 months, whichever is longer. d. inventory back into cash, or 12 months, whichever is longer.
45. The current assets section of the statement of financial position should include a. machinery.
b. patents. c. goodwill. d. inventory.
46. Which of the following is a current asset?
a. Cash surrender value of a life insurance policy of which the company is the bene-ficiary.
b. Investment in equity securities for the purpose of controlling the issuing company. c. Cash designated for the purchase of tangible fixed assets.
d. Trade installment receivables normally collectible in 18 months.
47. Equity or debt securities held to finance future construction of additional plants should be classified on a balance sheet as
a. current assets.
b. property, plant, and equipment. c. intangible assets.
d. long-term investments.
48. Each of the following are an intangible asset except a. copyrights.
b. goodwill.
c. plant expansion fund. d. trademarks.
49. Which of the following is not a long-term investment? a. Investments in ordinary shares
b. Franchise
c. Land held for speculation d. A sinking fund
50. A generally accepted method of valuation is 1. trading securities at market value.
2. accounts receivable at net realizable value. 3. inventories at current cost.
a. 1 b. 2 c. 3 d. 1 and 2
51. Which item below is not a current liability? a. Unearned revenue
b. Share dividends distributable
c. The currently maturing portion of long-term debt d. Trade accounts payable
52. Working capital is
a. capital which has been reinvested in the business. b. unappropriated retained earnings.
c. cash and receivables less current liabilities. d. none of these choices are correct.
53. An example of an item which is not an element of working capital is a. accrued interest on notes receivable.
b. goodwill.
c. goods in process. d. short-term investments. 54. Non-current liabilities include
a. obligations not expected to be liquidated within the next year or operating cycle. b. obligations payable at some date beyond the next year or operating cycle. c. deferred income taxes and most lease obligations.
d. All of these choices are correct.
55. Which of the following should be excluded from long-term liabilities? a. Obligations payable at some date beyond the operating cycle b. Most pension obligations
c. Non-current liabilities that mature within the operating cycle and will be paid from a sinking fund
d. None of these choices are correct. 56. Treasury shares should be reported as a(n)
a. current asset. b. investment. c. other asset.
d. reduction of equity.
57. Which of the following should be reported for share capital? a. The shares authorized
b. The shares issued c. The shares outstanding
d. All of these choices are correct.
58. The shareholders' equity section is usually divided into how many parts? a. 6
b. 5 c. 4 d. 3
59. Which of the following is not an acceptable major asset classification? a. Current assets
b. Investments
c. Property, plant, and equipment d. Deferred charges
60. Fulton Company owns the following investments:
Trading securities (fair value) $70,000 Non-trading securities (fair value) 35,000 Held-for-collection securities (amortized cost) 47,000 Fulton will report investments in its current assets section of a. $0.
b. exactly $70,000.
c. $70,000 or an amount greater than $70,000, depending on the circumstances. d. exactly $105,000.
61. For Grimmett Company, the following information is available:
Capitalized leases ¥200,000
Trademarks 55,000
Long-term receivables 75,000
In Grimmett’s statement of financial position, intangible assets should be reported at a. ¥ 55,000.
b. ¥ 75,000. c. ¥255,000. d. ¥275,000.
62. Houghton Company has the following items: share capital–ordinary, $820,000; treasury shares, $85,000; deferred taxes, $100,000 and retained earnings, $313,000. What amount should Houghton Company report as total equity?
a. $948,000. b. $1,048,000. c. $1,148,000. d. $1,218,000.
63. Kohler Company owns the following investments:
Trading securities (fair value) £ 60,000 Non-trading securities (fair value) 45,000 Held-for-collection securities (amortized cost) 57,000 Kohler will report securities in its long-term investments section of a. exactly £105,000.
b. exactly £117,000. c. exactly £162,000.
d. £102,000 or an amount less than £102,000, depending on the circumstances. 64. For Randolph Company, the following information is available:
Capitalized leases R280,000
Trademarks 110,000
Long-term receivables 105,000
In Randolph’s statement of financial position, intangible assets should be reported at a. R110,000.
b. R105,000. c. R390,000. d. R385,000.
65. Olmsted Company has the following items: share capital–ordinary, $920,000; treasury shares, $85,000; deferred taxes, $100,000 and retained earnings, $363,000. What amount should Olmsted Company report as total equity?
a. $1,098,000. b. $1,198,000. c. $1,298,000. d. $1,398,000.
66. Stine Corp.'s trial balance reflected the following account balances at December 31, 2015:
Accounts receivable (net) R$24,000
Trading securities 6,000 Accumulated depreciation—equipment 15,000 Cash 21,000 Inventory 30,000 Equipment 25,000 Patent 4,000 Prepaid expenses 2,000
Land held for future business site 18,000
In Stine's December 31, 2015 statement of financial position, the current assets total is a. R$101,000.
b. R$92,000. c. R$87,000. d. R$83,000.
67. Within the statement of financial position companies should separately report all of the following except
a. Assets and liabilities with different general liquidity characteristics.
b. Assets and liabilities that have been financed with different types of instruments. c. Assets that differ in their expected function in the company’s central operations. d. Liabilities that differ in their amounts, timing, and nature.
68. Within the statement of financial position where should the account non-controlling interest (minority interest) be reported?
a. Non-current assets. b. Non-current liabilities. c. Equity.
d. Current liabilities.
69. On the statement of financial position all of the following are reported as investments
except
a. Bonds, ordinary shares, and long-term notes. b. Non-controlling interest.
c. Pension funds.
70. Caroline, Inc. hired a new controller in late 2015. The controller has not prepared financial statements using IFRS before and needs your assistance. In compiling a complete set of financial statements under IFRS, in what order should the following items be reported in the equity section on the statement of financial position at December 31, 2015? If an item is not reported in the equity section, omit it from your answer.
I. Share premium II. Retained earnings III. Investments
IV. Non-controlling interest
V. Accumulated comprehensive income VI. Share capital
a. I, VI, IV, II, V, III b. VI, I, II, V, IV c. VI, I, IV, II, V d. III, VI, I, II, IV, V
71. Using IFRS, which of the following items is matched correctly with its basis of valuation for purposes of reporting on the statement of financial position?
Item Basis of Valuation
I. Inventory A. Cost
II. Prepaid expenses B. Estimated amount collectible
III. Receivables C. Lower-of-cost-or net realizable value a. I and A
b. II and C c. III and B d. II and B
72. Presented below are data for Antwerp Corp.
2014 2015 2016
Assets, January 1 €2,800 €3,360 ?
Liabilities, January 1 1,580 ? €2,016
Equity, Jan. 1 ? ? 2,100
Dividends 560 420 476
Increase in share capital–ordinary 504 448 500
Equity, Dec. 31 ? ? 1,596 Net Income 560 448 ? Equity at January 1, 2014 is a. € 504. b. € 560. c. €1,220. d. €1,724.
73. Presented below are data for Bandkok Corp. 2014 2015 2016 Assets, January 1 Rp 5,400 Rp6,480 ? Liabilities, January 1 3,440 ? Rp3,888 Equity, Jan. 1 ? ? 4,050 Dividends 1,080 810 918
Increase in share capital–ordinary 972 864 920
Equity, Dec. 31 ? ? 3,078 Net Income 1,080 864 ? Equity at January 1, 2015 is a. Rp1,690. b. Rp1,798. c. Rp2,932. d. Rp2,986.
74. Rosalie Corporation is located in London but does business throughout Europe. The company builds and sells equipment used in manufacturing pharmaceuticals. On December 31, 2015, Rosalie has trading securities valued at £63,000; goodwill valued at £450,000; prepaid insurance valued at £36,000; patents valued at £210,000; and a customer list valued at £390,000. On Rosalie Corporation’s statement of financial position at December 31, 2015, what amount should be reported as intangible assets?
a. £1,113,000 b. £1,149,000 c. £1,050,000 d. £660,000
75. The financial statement which summarizes operating, investing, and financing activities of an entity for a period of time is the
a. retained earnings statement. b. income statement.
c. statement of cash flows. d. statement of financial position.
76. The statement of cash flows provides answers to all of the following questions except a. where did the cash come from during the period?
b. what was the cash used for during the period?
c. what is the impact of inflation on the cash balance at the end of the year? d. what was the change in the cash balance during the period?
77. The statement of cash flows reports all of the following except a. the net change in cash for the period.
b. the cash effects of operations during the period. c. the free cash flows generated during the period. d. investing transactions.
78. Which of the following events will appear in the cash flows from financing activities section of the statement of cash flows?
a. Cash purchases of equipment.
b. Cash purchases of bonds issued by another company. c. Cash received as repayment for funds loaned.
d. Cash purchase of treasury stock.
79. Making and collecting loans and disposing of property, plant, and equipment are a. operating activities.
b. investing activities. c. financing activities. d. liquidity activities.
80. In preparing a statement of cash flows, sale of treasury stock at an amount greater than cost would be classified as a(n)
a. operating activity. b. financing activity. c. extraordinary activity. d. investing activity.
81. In preparing a statement of cash flows, which of the following transactions would be considered an investing activity?
a. Sale of equipment at book value b. Sale of merchandise on credit c. Declaration of a cash dividend
d. Issuance of bonds payable at a discount
82. Preparing the statement of cash flows, using the indirect method, involves all of the following except determining the
a. cash provided by operations.
b. cash provided by or used in investing and financing activities. c. change in cash during the period.
d. cash collections from customers during the period.
83. In a statement of cash flows, receipts from sales of property, plant, and equipment and other productive assets should generally be classified as cash inflows from
a. operating activities. b. financing activities. c. investing activities. d. selling activities.
84. In a statement of cash flows, interest payments to lenders and other creditors should be classified as cash outflows for
a. operating activities. b. borrowing activities. c. lending activities. d. financing activities.
85. In a statement of cash flows, proceeds from issuing equity instruments should be classified as cash inflows from
a. lending activities. b. operating activities. c. investing activities. d. financing activities.
86. On the statement of cash flows, which of the following items will affect both financing activities and operating activities?
a. Issuance of equity securities. b. Collection of loans to other entities. c. Payment of dividends.
d. Redemption of debt.
87. If ordinary shares were issued to acquire an CHF8,000 machine, how would the transaction appear on the statement of cash flows?
a. It would depend on whether or not the direct method or the indirect method was used. b. It would be a positive CHF8,000 in the financing section and a negative CHF8,000 in
the investing section.
c. It would be a negative CHF8,000 in the financing section and a positive CHF8,000 in the investing section.
d. It would not appear on the statement of cash flows but rather in a cash flow note. 88. In preparing a statement of cash flows, cash flows from operating activities
a. are always equal to accrual accounting income.
b. are calculated as the difference between revenues and expenses.
c. can be calculated by appropriately adding to or deducting from net income those items in the income statement that do not affect cash.
d. can be calculated by appropriately adding to or deducting from net income those items in the income statement that do affect cash.
89. Lohmeyer Corporation reports:
Cash provided by operating activities $250,000 Cash used by investing activities 110,000 Cash provided by financing activities 140,000
Beginning cash balance 120,000
What is Lohmeyer’s ending cash balance? a. $330,000.
b. $400,000. c. $550,000. d. $620,000.
90. Keisler Corporation reports:
Cash provided by operating activities TL200,000 Cash used by investing activities 110,000 Cash provided by financing activities 140,000
Beginning cash balance 90,000
What is Keisler’s ending cash balance? a. TL250,000.
b. TL320,000. c. TL470,000. d. TL540,000.
91. During 2015 the DLD Company had a net income of W200,000. In addition, selected accounts showed the following changes:
Accounts Receivable W12,000 increase
Accounts Payable 4,000 increase
Buildings 16,000 decrease
Depreciation Expense 6,000 increase
Bonds Payable 32,000 increase
What was the amount of cash provided by operating activities? a. W198,000
b. W200,000 c. W206,000 d. W238,000
92. Harding Corporation reports the following information:
Net income R$1,000,000
Depreciation expense 280,000
Increase in accounts receivable 120,000 Harding should report cash provided by operating activities of a. R$600,000.
b. R$840,000. c. R$1,160,000. d. R$1,400,000.
93. Sauder Corporation reports the following information:
Net income HK$750,000
Depreciation expense 210,000
Increase in accounts receivable 90,000 Sauder should report cash provided by operating activities of a. HK$450,000.
b. HK$630,000. c. HK$870,000. d. HK$1,050,000.
94. Caroline, Inc. exchanged a tract of land it held in Mississippi for a tract of land owned by Rosalie Corporation located in Illinois. How is this transaction reported on Caroline, Inc.’s statement of cash flows?
a. As a cash inflow from investing activities and a cash outflow from financing activities. b. As a cash inflow and a cash outflow from investing activities.
c. As a cash inflow and a cash outflow from financing activities.
d. This transaction is not reported in the body of the statement of cash flows. 95. Caroline, Inc. had the following transactions during 2015:
Exchanged land for a building $764,000 Purchased treasury shares 160,000 Paid cash dividend 380,000 Purchased equipment 212,000 Issued ordinary shares 588,000
What is Caroline, Inc.’s net cash provided (used) by investing activities? a. $212,000 used by investing activities.
b. $552,000 provided by investing activities. c. $372,000 used by investing activities. d. $392,000 provided by investing activities.
96. Caroline, Inc. had the following transactions during 2015: Exchanged land for a building £764,00
0 Purchased treasury shares 160,000 Paid cash dividend 380,000 Purchased equipment 212,000 Issued ordinary shares 588,000
What is Caroline, Inc.’s net cash provided (used) by financing activities? a. £600,000 provided by financing activities.
b. £48,000 provided by financing activities. c. £48,000 used by financing activities. d. £428,000 used by financing activities.
97. Cash debt coverage is computed by dividing net cash provided by operating activities by a. average non-current liabilities.
b. average total liabilities. c. ending non-current liabilities. d. ending total liabilities.
98. Current cash debt coverage is often used to assess a. financial flexibility.
b. liquidity. c. profitability. d. solvency.
99. A measure of a company’s financial flexibility is a. cash debt coverage.
b. current cash debt coverage. c. free cash flow.
d. cash debt coverage and free cash flow.
100. Free cash flow is calculated as net cash provided by operating activities less a. capital expenditures.
b. dividends.
c. capital expenditures and dividends. d. capital expenditures and depreciation.
101. One of the benefits of the statement of cash flows is that it helps users evaluate financial flexibility. Which of the following explanations is a description of financial flexibility?
a. The nearness to cash of assets and liabilities.
b. The firm's ability to respond and adapt to financial adversity and unexpected needs and opportunities.
c. The firm's ability to pay its debts as they mature.
d. The firm's ability to invest in a number of projects with different objectives and costs. 102. Net cash provided by operating activities divided by average total liabilities equals
a. current cash debt coverage. b. cash debt coverage.
c. free cash flow. d. the current ratio.
103. Packard Corporation reports the following information: Net cash provided by operating activities €275,000 Average current liabilities 150,000 Average non-current liabilities 100,000
Dividends declared 60,000
Capital expenditures 110,000
Payments of debt 35,000
Packard’s cash debt coverage is a. 1.10.
b. 1.83. c. 2.75. d. 6.11.
104. Packard Corporation reports the following information:
Net cash provided by operating activities $275,000
Average current liabilities 150,000
Average non-current liabilities 100,000
Dividends paid 60,000
Capital expenditures 110,000
Payments of debt 35,000
Packard’s free cash flow is a. $70,000.
c. $165,000. d. $215,000.
105. Pedigo Corporation reports the following information:
Net cash provided by operating activities £225,000
Average current liabilities 150,000
Average non-current liabilities 100,000
Dividends paid 60,000
Capital expenditures 110,000
Payments of debt 35,000
Pedigo’s cash debt coverage is a. 0.90.
b. 1.50. c. 2.25. d. 4.09.
106. In a statement of cash flows, payments to acquire debt instruments of other entities (other than cash equivalents) should be classified as cash outflows for
a. operating activities. b. investing activities. c. financing activities. d. lending activities.
107. Which of the following statement of financial position classifications would normally require the greatest amount of supplementary disclosure?
a. Current assets b. Current liabilities c. Plant assets
d. Long-term liabilities
108. The presentation of non-current liabilities in the statement of financial position should disclose
a. maturity dates. b. interest rates. c. conversion rights.
109. A complete set of financial statements includes each of the following except a. a statement of comprehensive income.
b. a statement of changes in equity. c. notes.
d. All of these answers are included.
110. Accounting policies include each of the following except a. principles.
b. conventions. c. rules.
d. All of these answers are included.
111. Caroline, Inc. hired a new controller in late 2015. The controller has not prepared financial statements using IFRS before and needs your assistance. In compiling a complete set of financial statements under IFRS, which of the following components must be included? a. A statement of financial position at the end of the period.
b. Notes, including a summary of significant accounting policies. c. A statement of comprehensive income for the period.
d. All of these choices are correct.
112. Which of the following statements is incorrect regarding notes to the financial statements?
a. IFRS requires specific note disclosures including disaggregation of inventories into classifications such as merchandise, production supplies, work in process, and finished goods.
b. IFRS requires a maturity analysis for receivables.
c. IFRS requires that all notes be clear, simple to understand, and non-technical in nature.
d. All of the choices are correct regarding notes to the financial statements.
P113. Which of the following is a contra account?
a. Premium on bonds payable b. Unearned service revenue c. Patents
d. Accumulated depreciation
114. Which of the following is not a method of disclosing pertinent information? a. Supporting schedules
b. Parenthetical explanations
c. Cross reference and contra items
Multiple Choice Answers
—ConceptualItem Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
31. d 44. d 57. d 70. b 83. c 96. b 109. d 32. c 45. d 58. a 71. c 84. a 97. b 110. d 33. b 46. d 59. d 72. c 85. d 98. b 111. d 34. d 47. d 60. c 73. c 86. d 99. d 112. c 35. d 48. c 61. a 74. c 87. d 100. c 113. d 36. c 49. b 62. b 75. c 88. c 101. b 114. d 37. b 50. d 63. d 76. c 89. b 102. b 38. c 51. b 64. a 77. c 90. b 103. a 39. a 52. d 65. b 78. d 91. a 104. b 40. c 53. b 66. d 79. b 92. c 105. a 41. d 54. d 67. b 80. b 93. c 106. b 42. d 55. d 68. c 81. a 94. d 107. d 43. b 56. d 69. b 82. d 95. a 108. d
Solutions to those Multiple Choice questions for which the answer is “none of these.” 41. Total assets minus total liabilities.
52. Current assets less current liabilities. 55. Many answers are possible.
EXERCISES
Ex. 5-115—Definitions.
Provide clear, concise answers for the following. 1. What are assets?
2. What are liabilities? 3. What is equity?
4. What are current liabilities?
5. Explain what working capital is and how it is computed. 6. What are intangible assets?
7. What are current assets?
Solution 5-115
1. Assets are resources controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.
2. Liabilities are present obligations of an entity arising from past events, the settlement of which is expected to result in an outflow from an entity of resources embodying economic benefits. 3. Equity is the residual interest in the assets of an entity after deducting all its liabilities.
4. Current liabilities are obligations that are expected to be settled in the normal operating cycle, or one year, whichever is longer.
5. Working capital is the net amount of a company’s relatively liquid resources. It is the excess of total current assets over total current liabilities.
6. Intangible assets are economic resources or competitive advantages that lack physical substance and have a high degree of uncertainty about the future benefits to be received. They are not financial instruments.
7. Current assets are cash and other resources (future economic benefits) expected to be converted to cash, sold, or consumed in one year or the operating cycle, whichever is longer.
Ex. 5-116—Terminology.
In the space provided at right, write the word or phrase that is defined or indicated.
1. Obligations expected to be settled in the 1.____________________________________ next year or operating cycle.
2. Statement showing assets, liabilities, and 2.____________________________________ equity at a point in time.
3. Probable future outflows of economic 3.____________________________________ benefits.
4. Resources expected to be used, sold, or 4.____________________________________ converted to cash in one year or the
operating cycle, whichever is longer.
5. Tangible long-lived assets used in regular 5.____________________________________ operations.
6. Economic rights or competitive advantages 6.____________________________________ which lack physical substance.
7. Resources expected to provide future
economic benefits. 7.____________________________________ 8. Residual interest in the net assets of an 8.____________________________________
entity.
Solution 5-116
1. Current liabilities. 5. Property, plant, and equipment. 2. Statement of financial position. 6. Intangible assets.
3. Liabilities. 7. Assets.
4. Current assets. 8. Equity.
Ex. 5-117—Current assets.
Define current assets without using the word "asset."
Solution 5-117
Current assets are resources (future economic benefits) expected to be converted to cash, sold, or consumed in one year or the operating cycle, whichever is longer.
Ex. 5-118—Account classification.
ASSETS EQUITY AND LIABILITIES
a. Investments f. Share capital
b. Plant and equipment g. Share premium
c. Intangibles h. Accumulated comprehensive income
d. Other assets i. Retained earnings
e. Current assets j. Non-current liabilities k. Current liabilities
l. Items excluded from statement of financial position
Using the letters above, classify the following accounts according to the preferred and ordinary statement of financial position presentation.
_____ 1. Bond sinking fund _____ 2. Prepaid pension cost
_____ 3. Restricted retained earnings _____ 4. Current maturity of long-term debt _____ 5. Bonds payable (due in 3 years)
_____ 6. Unrealized gain on non-trading securities
_____ 7. Securities owned by another company which are collateral for that company's note _____ 8. Trading securities
_____ 9. Inventory
_____ 10. Mortgage payable _____ 11. Patents
_____ 12. Unearned rent revenue
Solution 5-118
1. a 5. j 9. e
2. d 6. h 10. j
3. i 7. l 11. c
Ex. 5-119—Valuation of Statement of Financial Position Items.
Use the code letters listed below (a – l) to indicate, for each statement of financial position item (1 – 13) listed below the usual valuation reported on the statement of financial position.
______ 1. Share capital–ordinary ______ 7. Long-term bonds payable ______ 2. Prepaid expenses ______ 8. Land (in use)
______ 3. Property, plant, and equipment ______ 9. Land (future plant site) ______ 4. Accounts receivable ______ 10. Patents
______ 5. Copyrights ______ 11. Trading securities ______ 6. Inventory ______ 12. Accounts payable a. Par value
b. Current cost of replacement
c. Amount payable when due, less unamortized discount or plus unamortized premium d. Amount payable when due
e. Fair value at statement of financial position date f. Net realizable value
g. Lower-of-cost-or-net-realizable value h. Original cost less accumulated amortization i. Original cost less accumulated depletion j. Original cost less accumulated depreciation k. Historical cost
l. Unexpired or unconsumed cost
Solution 5-119
1. a 5. h 9. k
2. l 6. g 10. h
3. j 7. c 11. e
Ex. 5-120—Statement of financial position classifications.
Typical statement of financial position classifications are as follows.
a. Investments g. Share Premium
b. Plant Assets h. Retained Earnings
c. Intangible Assets i. Non-Current Liabilities
d. Other Assets j. Current Liabilities
e. Current Assets k. Notes to Financial Statements
f. Share Capital l. Not Reported on Statement of Financial Position
Indicate by use of the above letters how each of the following items would be classified on a statement of financial position prepared at December 31, 2015. If a contra account, or any amount that is negative or opposite the normal balance, put parentheses around the letter selected. A letter may be used more than once or not at all.
_____ 1. Accrued salaries and wages _____ 2. Rental revenues for 3 months
collected in advance _____ 3. Land used as plant site _____ 4. Equity securities classified as
trading _____ 5. Cash
_____ 6. Accrued interest payable due in 30 days
_____ 7. Share premium–preference shares _____ 8. Dividends in arrears on preference
shares
_____ 9. Petty cash fund _____ 10. Ordinary shares
_____ 11. Bond indenture covenants _____ 12. Allowance for doubtful accounts _____ 13. Accumulated depreciation
______ 14. Goodwill
______ 15. 90 day notes payable
______ 16. Investment in bonds of another company; will be held to 2019 maturity ______ 17. Land held for speculation
______ 18. Death of company president ______ 19. Current maturity of bonds payable ______ 20. Trade accounts payable
______21. Preference shares ($10 par) ______22. Prepaid rent for next 12 months ______ 23. Copyright
______ 24. Accumulated amortization, patents ______ 25. Earnings not distributed to
Solution 5-120 1. j 6. j 11. k 16. a 21. f 2. j 7. g 12. (e) 17. a 22. e 3. b 8. k 13. (b) 18. l 23. c 4. e 9. e 14. c 19. j 24. (c) 5. e 10. f 15. j 20. j 25. h
Ex. 5-121—Statement of financial position classifications.
The various classifications listed below have been used in the past by Maris Company on its statement of financial position. It asks your professional opinion concerning the appropriate classification of each of the items 1-12 below.
a. Investments f. Share Capital and Share Premium b. Plant and Equipment g. Retained Earnings
c. Intangible Assets h. Non-Current Liabilities d. Other Assets i. Current Liabilities e. Current Assets
Indicate by letter how each of the following items should be classified. If an item need not be reported on the statement of financial position, use the letter "X." A letter may be used more than once or not at all. If an item can be classified in more than one category, choose the category most favored by the authors of your textbook.
_____ 1. Employees' payroll deductions. _____ 2. Cash in sinking fund.
_____ 3. Rent revenue collected in advance.
_____ 4. Equipment retired from use and held for sale. _____ 5. Patents.
_____ 6. Payroll cash fund.
_____ 7. Accrued revenue on temporary investments. _____ 8. Advances to salespersons.
_____ 9. Bank overdraft.
_____ 10. Salaries which company budget shows will be paid to employees within the next year. _____ 11. Work in process.
Solution 5-121
1. i 5. c 9. i
2. a 6. e 10. x
3. i 7. e 11. e
4. d or e 8. e 12. g
Ex. 5-122—Statement of financial position classifications.
The various classifications listed below have been used in the past by Hale Company on its statement of financial position.
a. Investments e. Share Capital and Share Premium b. Plant and Equipment f. Retained Earnings
c. Intangible Assets g. Non-current Liabilities d. Current Assets h. Current Liabilities
Instructions
Indicate by letter how each of the items below should be classified at December 31, 2015. If an item is not reported on the December 31, 2015 statement of financial position, use the letter "X" for your answer. If the item is a contra account within the particular classification, place parentheses around the letter. A letter may be used more than once or not at all.
Sample question and answer:
(d) Allowance for doubtful accounts.
_____ 1. Customers' accounts with credit balances. _____ 2. Bond sinking fund.
_____ 3. Salaries which the company's cash budget shows will be paid to employees in 2016. _____ 4. Accumulated depreciation.
_____ 5. Appropriation for plant expansion. _____ 6. Amortization of patents for 2015. _____ 7. Deferred income taxes payable. _____ 8. Trading securities.
_____ 9. Launching of Hale’s Internet retailing division in February, 2016.
_____ 10. Cash dividends declared on December 15, 2015 payable to shareholders on January 15, 2016.
Solution 5-122
1. h 4. (b) 7. g 10. h
2. a 5. f 8. d
3. x 6. x 9. x
Ex. 5-123—Statement of cash flows.
For each event listed below, select the appropriate category which describes the effect of the event on a statement of cash flows:
a. Cash provided/used by operating activities. b. Cash provided/used by investing activities. c. Cash provided/used by financing activities. d. Not a cash flow.
_____ 1. Payment on long-term debt _____ 2. Issuance of bonds at a premium _____ 3. Collection of accounts receivable _____ 4. Cash dividends declared
_____ 5. Issuance of ordinary shares to acquire land _____ 6. Sale of non-trading securities (long-term) _____ 7. Payment of employees' wages
_____ 8. Issuance of share capital–ordinary for cash _____ 9. Payment of income taxes payable
_____ 10. Purchase of equipment
_____ 11. Purchase of treasury shares (ordinary)
_____ 12. Sale of real estate held as a long-term investment
Solution 5-123
1. c 4. d 7. a 10. b
2. c 5. d 8. c 11. c
Ex. 5-124—Statement of cash flows ratios.
Financial statements for Hilton Company are presented below: Hilton Company
Statement of Financial Position December 31, 2015
Assets Equity & Liabilities
Buildings and equipment $150,000 Share capital–ordinary $ 65,000
Accumulated depreciation— Retained earnings 60,000
buildings and equipment (50,000)
Patents 20,000
Accounts receivable 35,000 Bonds payable 50,000
Cash 40,000 Accounts payable 20,000
$195,000 $195,000
Hilton Company Statement of Cash Flows
For the Year Ended December 31, 2015 Cash flows from operating activities
Net income $45,000
Adjustments to reconcile net income to net cash provided by operating activities:
Increase in accounts receivable $(16,000)
Increase in accounts payable 8,000
Depreciation expense 15,000
Gain on sale of equipment (6,000)
Amortization of patents 2,000 3,000
Net cash provided by operating activities 48,000
Cash flows from investing activities
Sale of equipment 12,000
Purchase of land (25,000)
Purchase of buildings and equipment (48,000)
Net cash used by investing activities (61,000)
Cash flows from financing activities
Payment of cash dividend (15,000)
Sale of bonds 40,000
Net cash provided by financing activities 25,000
Net increase in cash 12,000
Cash, January 1, 2015 28,000
Cash, December 31, 2015 $40,000
At the beginning of 2015, Accounts Payable amounted to $12,000 and Bonds Payable was $10,000.
Instructions
Calculate the following for Hilton Company: a. Current cash debt coverage
b. Cash debt coverage c. Free cash flow
Solution 5-124
Net cash provided by operating activities a. Current cash debt coverage = ——————————————————
Average current liabilities
$48,000 $48,000
= ——————————— = ———— = 3.0 : 1 ($12,000 + $20,000) ÷ 2 $16,000
Net cash provided by operating activities
b. Cash debt coverage = ——————————————————
Average total liabilities
$48,000 $48,000
= ——————————— = ———— = 1.0 : 1 ($22,000 + $70,000) ÷ 2 $46,000
c. Free cash flow = Net cash provided by operating activities – capital expenditures and dividends
= $48,000 – *$73,000 – $15,000 = $(40,000) *$25,000 + $48,000
PROBLEMS
Pr. 5-125—Statement of financial position presentation.
The following statement of financial position was prepared by the bookkeeper for Kraus Company as of December 31, 2015.
Kraus Company
Statement of Financial Position as of December 31, 2015
Investments £ 76,300 Equity £215,500
Equipment (net) 96,000 Non-current liabilities 100,000
Patents 32,000 Accounts payable 78,000
Inventories 57,000
Accounts receivable (net) 52,200
Cash 80,000
£
393,500 £ 393,500
The following additional information is provided:
1. Cash includes the cash surrender value of a life insurance policy £12,400, and a bank overdraft of £2,500 has been deducted.
2. The net accounts receivable balance includes: (a) accounts receivable—debit balances £60,000; (b) accounts receivable—credit balances £4,000; (c) allowance for doubtful accounts £3,800.
3. Inventories do not include goods costing £5,000 shipped out on consignment. Receivables of £5,000 were recorded on these goods.
4. Investments include investments in ordinary shares, trading £19,000 and non-trading £48,300, and franchises £9,000.
5. Equipment costing £5,000 with accumulated depreciation £4,000 is no longer used and is held for sale. Accumulated depreciation on the other equipment is £40,000.
Instructions
Prepare a statement of financial position in good form (shareholders' equity details can be omitted.)
Solution 5-125
Kraus Company
Statement of Financial Position As of December 31, 2015
Assets Investments
Non-trading securities £48,300
Cash surrender value of life insurance 12,400 £60,700 Property, plant, and equipment
Equipment 135,000 (5)
Less: Accumulated depreciation 40,000 95,000
Intangible assets
Patents 32,000
Franchises 9,000 41,000
Current assets
*Equipment held for sale 1,000 (4)
Inventories 62,000 (3)
Accounts receivable £55,000 (2)
Less: Allowance for doubtful accounts 3,800 51,200
Trading securities 19,000
Cash 70,100 (1)
Total current assets 203,300
Total assets £ 400,000
Equity and Liabilities
Equity £ 215,500
Non-current liabilities £100,000
Current liabilities
Accounts payable £82,000 (6)
Bank overdraft 2,500
Total current liabilities 84,500
Total liabilities 184,500
Total liabilities and equity £ 400,000
(1) (£80,000 – £12,400 + £2,500) (2) (£60,000 – £5,000) (3) (£57,000 + £5,000) (4) (£5,000 – £4,000) (5) (£96,000 + £40,000 – £5,000 + £4,000) (6) (£78,000 + £4,000)
Pr. 5-126—Statement of financial position presentation.
Given the following account information for Leong Corporation, prepare a statement of financial position in report form for the company as of December 31, 2015. All accounts have normal balances. Equipment ¥ 40,000 Interest Expense 2,400 Interest Payable 600 Retained Earnings ? Dividends 50,400 Land 157,320 Inventory 102,000 Bonds Payable 78,000
Notes Payable (due in 6 months) 24,400 Share Capital–Ordinary 60,000 Accumulated Depreciation - Equip. 10,000
Prepaid Advertising 5,000 Revenue 351,400 Buildings 80,400 Supplies 1,860 Taxes Payable 3,000 Utilities Expense 1,320 Advertising Expense 1,560
Salaries and Wages Expense 53,040 Salaries and Wages Payable 900 Accumulated Depr. - Buildings 15,000
Cash 40,000
Solution 5-126
Leong Corporation Statement of Financial Position
December 31, 2015 Assets
Property, plant and equipment
Land ¥157,320
Buildings ¥ 80,400
Accumulated depreciation - buildings (15,000) 65,400
Equipment 40,000
Accumulated depreciation -equipment (10,000) 30,000
Total property, plant and equipment ¥252,720
Current assets
Inventory 102,000
Supplies 1,860
Prepaid advertising 5,000
Cash 40,000
Total current assets 148,860
Total assets ¥ 401,580
Equity & Liabilities Equity Share capital-ordinary ¥60,000 Retained earnings (¥285,080*- ¥50,400) 234,680 Total equity ¥ 294,680 Non-current liabilities Bonds payable 78,000 Current liabilities Notes payable ¥ 24,400 Taxes payable 3,000
Salaries and wages payable 900
Interest payable 600
Total current liabilities 28,900
Total liabilities 106,900
Total equity & liabilities ¥ 401,580
Pr. 5-127—Statement of cash flows preparation.
Selected financial statement information and additional data for Stanislaus Co. is presented below. Prepare a statement of cash flows for the year ending December 31, 2016
December 31
2015 2016
Land... € 63,800 € 21,000 Equipment... 504,000 789,600 Inventory... 173,000 201,600 Accounts receivable (net)... 84,000 151,200 Cash... 32,000 63,000 TOTAL... € 856,800 € 1,226,400 Share capital–ordinary... €420,000 € 487,200 Retained earnings... 67,200 205,800 Notes payable - Long-term... 168,000 302,400 Notes payable - Short-term (trade)... 67,200 29,400 Accounts payable... 50,400 86,000 Accumulated depreciation... 84,000 115,600 TOTAL... € 856,800 € 1,226,400 Additional data for 2016:
1. Net income was €215,200. 2. Depreciation was €31,600. 3. Land was sold at its original cost. 4. Dividends of €76,600 were paid.
5. Equipment was purchased for €84,000 cash.
6. A long-term note for €201,600 was used to pay for an equipment purchase. 7. Ordinary shares were issued to pay a €67,200 long-term note payable.
Solution 5-127
Stanislaus Co. Statement of Cash Flows
For the year ended December 31, 2016
Net Income €215,200
Cash flow from operating activities
Depreciation expense €31,600
Increase in accounts receivable (67,200)
Increase in inventory (28,600)
Increase in accounts payable 35,600
Decrease in short-term notes payable (37,800) (66,400) Net cash provided by operating activities 148,800 Cash flow from investing activities
Purchase equipment (84,000)
Sale of land 42,800
Net cash used by investing activities (41,200) Cash flow from financing activities
Payment of cash dividend (76,600)
Net increase in cash 31,000
Cash at beginning of year 32,000
Cash at end of the year €63,000
Noncash investing and financing activities
Payment of long-term note payable with issuance of €67,200 of ordinary shares Long-term note issued as payment of equipment purchase, €201,600
Pr. 5-128—Statement of cash flows preparation.
Selected financial statement information and additional data for Johnston Enterprises is presented below. Prepare a statement of cash flows for the year ending December 31, 2016
Johnston Enterprises
Statement of Financial Position and Income Statement Data
December 31, December 31, 2016 2015 Property, Plant, and Equipment HK$1,241,000 HK$1,122,000 Less: Accumulated Depreciation (476,000) (442,000)
765,000 680,000 Current Assets:
Inventory 391,000 340,000
Accounts Receivable 238,000 306,000
Cash 153,000 119,000
Total Current Assets 782,000 765,000
Total Assets HK$1,547,000 HK$1,445,000 Equity: Share Capital–Ordinary HK$ 510,000 HK$ 467,500 Retained Earnings 374,000 340,000 Total Equity 884,000 807,500 Non-Current Liabilities: Bonds Payable 340,000 391,000 Current Liabilities: Accounts Payable 187,000 102,000 Notes Payable 51,000 68,000
Income Taxes Payable 85,000 76,500
Total Current Liabilities 323,000 246,500
Total Liabilities 663,000 637,500
Total Liabilities & Equity HK$1,547,000 HK$1,445,000
Sales Revenue HK$1,615,000 HK$1,513,000
Less Cost of Goods Sold 731,000 731,000
Gross Profit 884,000 782,000
Expenses:
Depreciation Expense 153,000 136,000
Salaries and Wages Expense 391,000 357,000
Interest Expense 34,000 34,000
Loss on Sale of Equipment 17,000 0
Income Before Taxes 289,000 255,000
Less Income Tax Expense 119,000 102,000
Net Income HK$ 170,000 HK$ 153,000
During the year, Johnston sold equipment with an original cost of HK$153,000 and accumulated depreciation of HK$119,000 and purchased new equipment for HK$272,000.
Solution 5-128
Johnston Enterprises Statement of Cash Flows
For the Year Ended December 31, 2016
Net Income HK$ 170,000
Cash flow from operating activities
Depreciation expense HK$153,000 Loss on sale of equipment 17,000 Decrease in accounts receivable 68,000
Increase in inventory (51,000)
Increase in accounts payable 85,000 Decrease in notes payable (17,000)
Increase in tax payable 8,500 263,500 Net cash provided by operating activities 433,500 Cash flow from investing activities
Sale of equipment 17,000
Purchase of equipment (272,000)
Net cash used by investing activities (255,000) Cash flow from financing activities
Retirement of bonds payable (51,000) Issuance of ordinary shares 42,500 Payment of dividends (136,000)**
Net cash used by financing activities (144,500)
Net increase in cash 34,000
Beginning cash 119,000
Cash at end of year HK$153,000
**Beginning R/E Net income Dividends Ending R/E HK$340,000 HK$170,000 Dividends HK$374,000 Dividends HK$136,000
