Answers to True or False, relating to SFP, with explanations:

T F 1. Financial statements are prepared using the accrual basis of accounting.

Except for the statement of cash flows, all other financial statements are
prepared based on the accrual basis.

T F 2. Financial statements are directed toward specific information needs of the

management.

Financial statements are general purpose financial reports and are directed
toward the common information needs of the users, which are primarily the
present and potential investors, lenders and other creditors.

T F 3. Financial statements are general-purpose financial reports for an

enterprise.

T F 4. Complicated events and transactions completed by an enterprise during a

reporting period should not be included in the financial statements because
they may be too difficult for users to understand.

Understandability depends on two factors: the characteristics of the

information and the characteristics of the users. The preparers have the
responsibility on the first factor, while the users have the responsibility on
the second factor. In some instances, the users may have to engage the
services of some other professionals (consultants and analysts) to
understand the information presented in the financial statements.

T F 5. The financial position of an entity is shown during a period of time.

The elements assets, liabilities and equity, shown on the statement of

financial position are elements at a point in time, which is the end of the
reporting period.

T F 6. The statement of financial position presents the assets, liabilities and

equity of an entity at a point in time.

T F 7. The financial performance of an entity is shown for a period of time.

Except for the statement of financial position, all other financial statements
including the statement of comprehensive income, present information for a
period of time.

T F 8. The responsibility for the presentation of the company’s financial

statements rests with the external auditor.

The management of the enterprise is primarily responsible for the

presentation of the financial statements. The auditor is an independent
party that issues an opinion on the fairness of presentation of the financial
statements, taken as a whole.

T F 9. Financial statements show directly the performance of the management.

 The financial statements show directly the performance of the entity, and
indirectly the performance of the management, as stewards of the entity’s
resources.

T F 10. The financial statements show directly the performance of the entity.

T F 11. All information presented in the financial statements is factual.

Information presented in the financial statements combine facts, estimates

and judgments. Estimates and judgments may be necessary for an entity to
report the results of continuing transactions, which may be difficult to
measure with preciseness. The management, as the preparers of the
financial statements, has to strike a balance between relevance (including
timeliness) and reliability.

T F 12. Generally, assets in the statement of financial position should be presented

according to liquidity.

Assets and liabilities, generally, are classified into current and non-current,
except that when management assesses that presentation based on liquidity
provides information that is more relevant and faithfully represented.

T F 13. When assets and liabilities are not classified as current and non-current in
the statement of financial position, they are arranged broadly in the order
of liquidity.

If the exception described in number 12 applies, assets and liabilities are

presented broadly in the order of liquidity.

T F 14. Current assets are always the first classification in the statement of
financial position.

Financial statements are entity-specific, such that entities may present

assets and liabilities in a manner that may be more relevant to the users.
For example, companies such as Meralco, Maynilad, NAPOCOR, PLDT may
present assets starting with the most important, such as power-generating
plants and equipment, which are classified as Non-current.

T F 15. A trade receivable that is collectible beyond twelve months after the
reporting period is still classified as current asset, if the terms of credit are
in accordance with the normal credit policy of the enterprise.

Trade receivables and inventories are generally classified as current assets

because they are expected to be collected in cash ( receivables) or sold
inventories) within the entity’s normal operating cycle.

T F 16. A financial liability with an original maturity date of within twelve months
from the end of the reporting period is classified as non-current if the
company is able to complete a negotiation with the lender, before the end
of the reporting period, for the extension of the credit terms on a long-term
basis.

The entity, as of the reporting date, has an unconditional right and intention
to settle the obligation on a long term basis (12 months after the end of the
reporting period), hence, the liability is classified as non-current.
T F 17. Share Dividends Distributable is classified as part of contributed capital
under shareholders’ equity.

Share dividends distributable shall soon become issued share capital, and
is classified as contributed capital.

T F 18. A properly classified statement of financial position must always be

presented using the report form.

As discussed in your textbook, the statement of financial position may be

prepared using any of the following formats: report form, account form, and
financial position form ( the latter emphasizing the entity’s working capital}

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