CHAPTER 1 FINANCIAL STATEMENTS TECHNICAL KNOWLEDGE To identify the components of financial statements. To know the objective of financial statements. To know the objective of financial reporting. To understand the primary responsibility for the preparation of financial statements. To identify the general fealures in the preparation of financial statements. Scanned with CamScannerFINANCIAL STATEMENTS ns by which the informe; i ial statements are the means b I natin Saeesutoied and processed in financial accounting i periodically communicated to the users. i i a structured finang inancial statements are - "uC i ial St of the financial position and financial performance of an entity. General purpose financial statements General purpose financial statements are those statements intended to meet the needs of users who are not in a position to requiré an entity to prepare reports tailored to their particular information needs. Reports prepared at the request of an entity's management or bankers are not general purpose financial statements because they are prepared specifically to meet the needs of management or bankers. Components of financial statements A complete set of financial statements comprises the following components: Statement of financial position Income statement Statement of comprehensive income Statement of changes in equity Statement of cash flows Notes, comprising a summary of significant accounti, Policies and other explanatory information 5 ook eNe Many entities also environmental re particularly in indu significant and whe user group. Present reports and statements such Ports and value added statemet 2 stries in which environmental fy @2e2ts ‘ACO; : n employees are regarded as an importa? ani However, such statements and reports are not co, “ a of financial statements Ponents ~ Scanned with CamScannerobjective of financial statements e objective ©, a Deis pipet purpose financial statements is to vrformance and en out the financial position, financial Een sh flows of an entity that is useful lo a wit ge of users in making economic decisions. statements also show the results of the stewardship Financial ement of the resources entrusted to it. of manag To meet this objective, financial statements provide information about the following: a, Assets b. Liabilities c. Equity d. Income and expenses, inclu ns by and distribution: ding gains and losses e. Contributio’ s to owners in their capacity as owners f, Cash flows tion, along with other information in the notes, of financial statements in predicting the Such informa’ din particular their timing and certainty. would assist users entity's cash flows an However, financial statements do not provide all the information that users may need to make economic decisions. largely portray the neial statements | ly provide the fina d do not necessar? The reason is that past events an financial effects of nonfinancial information. Scanned with CamScannerFinancial position The financial position comprises the assets, liabilities ang equity of an entity at a particular moment in time, Specifically, financial position pertains to the liquidity, Solvency and the need of the entity for additional financing. This information is pictured in the statement of financial Position. Financial performance The financial performance comprises the revenue, expenses and net income or loss of an entity for a period of time. Performance is the level of income earned by the entity through the efficient and effective use of its resources, The financial performance of an entity is also known as resulis of operations ‘and is Portrayed in the income statement and statement of comprehensive income, Cash flows Cash flows are the cash receipts and cash the c: 5 ‘ . Payments arising from the operating, investing and financing Activities of the entity. 0 The information about cash receipts and Presented in the statem cash Payments js ent of cash flows, . Cash flow information is useful in assessing the . ability 4 entity to generate cash and cash equivalents, ¥ of the Scanned with CamScannerFinancial reporting The principal way of providing fi . . ni i : users is through the annual nancial eta rmation to external abi Unig reporting encompasses not only financial stat ements ut also other means of communicating information that relates directly or indirectly to the financial accounting process. Financial reports include not only financial statements but also other information such as financial highlights, summary of important financial figures, analysis of financial statements and significant ratios. Financial reports also include nonfinancial information such as description of major products and a listing of corporate officers and directors: Objective of financial reporting Under the Conceptual Framework for Financial Reporting, the to provide financial information objective of financial reporting is nan ¢ about the reporting entity that ts useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. ive of financial reporting is rall object an p fe | for decision making. Simply stated, the ove ud hat is useft to provide information t Scanned with CamScannerTarget users of financial reporting General purpose financial reporting is directed Primarily * the existing and potential investors, lenders and other Creditor, which compose the primary user group. The reason is that existing and potential investors, lenders and other creditors have the most critical and immediate need for information in financial reports. As a matter of fact, the primary users of financial information ~are the parties that provide resources to the entity. Moreover, information that meets the needs of the specified primary users is likely to meet the needs of other users such ag employees, customers, governments and their agencies. The management of a reporting entity is also interested in financial information about the entity. However, management need not rely on general purpose financial reports because it is able to obtain or access additional financial information internally. Specific objectives of financial reporting Specifically, the Conceptual Framework for Financial Reporting states the following objectives of financial reporting: a. To Provide information useful in making investing and credit decisions about Providing resources to the entity. b. To provide information useful in assessing the cash flow Prospects of the entity, ©. To provide inform: ation about entity resou: lai d 1 rces, claims an changes in resou: o ° ces and claims. Scanned with CamScannerLimitations of financial eee rting a. General pur; i cra’ purpose financi provide all of the informa investors, lenders and al id canni al yea do not and cannot a Ghat existing and potential b. General pur i i ve ik ne Purpose financial reports are not designed t signed to ww the value ees of a rey i . rovide z ‘porting enti pro is information to help the ity but these reports alue of the entit: primary users estimate c. General purpos i ! e financial provide ‘éo 7 reports are intend Peuaticdateltien information to users and eared 'Y specific request for information. d. To a large extent, fi i ] » financial reports are based and judgment rather than exact depiction. on estimate Responsibility for financial statements The management of an entit, i ibilit n ty has the primary responsibility for the preparation and presentation of financial statements. The Board of Directors in discharging its responsibilities reviews and authorizes the financial statements for issue before these are submitted to the shareholders of the entity. le for the safekeeping of the Management is accountab efficient and profitable use. resources and their proper, Shareholders are interested in information that helps them agement has fulfilled this role as assess how effectively man , dt jon concerning their investment this is relevant to the decisi and the reappointment or replacement of management. al statements General features of financii ith PFRS Fair presentation and compliance W: Going concern Accrual basis Materiality an‘ Offsetting Frequency © Comparative Consistency © d aggregation f reporting jnformation f presentation PIRI hE 7 Scanned with CamScannerFair presentation The financial statements shall present fairly the financig) position, financial performance and cash flows of an entity. Virtually, in all circumstances, fair presentation is achieve if the financial statements are prepared in accordance with the Philippine Financial Reporting Standards which represent the GAAP in the Philippines. The application of Philippine Financial Reporting Standards, with additional disclosure when necessary,. is presumed to result in financial statements that achieve a fair presentation. An entity whose financial statements comply with PFRS shall make an explicit and unreserved statement of such compliance in the notes. . Fair presentation is defined as faithful representation of the effects of transactions and other events in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses laid down in the Conceptual Framework. Fair presentation requires an entity: a. To select and apply accounting policies in accordance with PFRS. . b. To present information, including accounting policies, in a manner that provides relevant and faithfully represented financial information. c. To provide additional disclosures necessary for the users to understand the entity's financial statements An entity cannot rectify inappropriate accounting policies either by disclosure of the accounting policies used or by notes or explanatory information. init "Scanned with CamScanneree Departure fr A standard In the extremel LY rave cir voncludes: tl 4 ‘cumstances j . reais iat eomplinnee with a reaaivantnich management nisleadi it yoquiromont Le leading, the entity ehailties in a standard Provided the relevant regul: eae from that egulatory Conceptual Framework requir ‘hk requires, or otherwise d doparture, ¢ does not prohibit, such a Thun, an entity is permitted to depart from tandard: a standard: a, In extremely rare circumstances. b, When management sment coneludes compl i standard would be misleading ‘ompliance with the c. When the departe the departure from the standard i : es ~ oar achieve fair presentation. sional d, When the regulatory Conceptual Framework requires or otherwise does not prohibit such a departure. In such circumstances, it is incumbent upon the entity to disclose the following: 1, ‘The management has concluded that the financial statements present fairly the financial position, financial performance and cash flows of the entity. as complied with applicable standards arted from a particular requirement 2. That the entity h except that it has departed to achieve a fair presentation. 4. The title of the standard from which the entity has departed, including the treatment that the nature of the departure, a ire, the reason why that treatment the standard would requ : would be so misleading and the treatment adopted. , the financial impact of the cial statements that eriod presented, ing with the tem in the finan ed in comply 4. For each p departure on each i would have been re requirement. port Scanned with CamScannerBs Going concern Going concern means that the accounting entity is vie continuing in operation indefinitely in the absence of evia Ch to the contrary. dene Going concern is also known as continuity assumption, In other words, financial statements are prepared normal} on the assumption that the entity shall continue in Operation for the foreseeable future. Thus, assets are normally recorded at original acquisition cost. As a rule, market values are ignored. However, some standards require measurement of certain assets at fair value. Going concern is particularly relevant when management shall make an estimate of the expected outcome of future events, such as the recoverability of accounts receivable and the useful life of noncurrent assets. This postulate is the very foundation of the cost principle. Financial statements shall be prepared on a going concern basis unless management intends to liquidate the entity or cease trading or has no realistic option but to do so. When upon assessment it becomes evident that there are material uncertainties regarding the ability of the entity to continue as a going concern, those uncertainties shall be fully disclosed. In making the assessment about the going concern assumption, management shall take into account all available information about the future which is at least twelve months from the end of reporting period. If the financial statements are not prepared on a going concern basis, such fact shall be disclosed together with the measurement basis and the reason therefor. A cl Scanned with CamScannerAccrual basis An entity shall Prepare accrual basis ofS Ppare the Accounting ¢: Under accrual basis, t} events a re recognized 1 rh + cash equivalent: ig receh Ei and reported in the finan which they relate, inancia nts, using al statements, usi 4 : lements, using th xcept for cash flow information. ffee i ae of transactions and other lon °y eee and not as cash or fama Paid, and they are recorded statements of the periods to In the simplest lang, Y angua, : are recognized when resent’ fe received, and liabilities 5 when actually paid. al basis means that a t assets a ‘ather than when physically are cecognized payable rather than Accrual accountin, i ‘nuing means that income i. i a is recognized when eo regardless of when received and expense is recognized when incurred regardless of when paid. The essence of accrual accounting is the recognition of accounts receivable, accounts payable, prepaid expenses, accrued expenses, deferred income, and accrued income. Materiality and aggregation An entity shall present separately each material class of similar items. An entity shall present separately items of dissimilar nature or function unless they are immaterial. It from processing large number of ts that are aggregated into classes function. Financial statements resw transactions or other even! according to their nature or i rocess of aggregation and classification isthe nel ote oe condensed and classified data which form line items in the financial statements. ; in bank h and ash fund, cas! d as one item “cas d, petty ca For example, cash on hand, etty ca and cash Squivalent shall be presente: cash equivalents”. ‘ erials and ess, raw mat ° das one s in proc Le oods in P regated and presente Finished goods, 8° apereg! manufacturing supplies are agerce! item “inventories - 11 Scanned with CamScannerIf a line item is not individually material, it is agg, 5 e with other items either in those statements or in the ated Notes. For example, an investor's share in the net income Of a, associate is presented as a separate line item in the income a le statement. However, if this amount is not individually material, it may be aggregated with other income. Materiality dictates that "an entity need not provide a Specific disclosure required by PFRS if the information is no; material". When is an item material? There is no strict or uniform rule for determining whether an item is material or not. Very often, this is dependent on good judgment, professional expertise and common sense. However, a general guide may be given, to wit: An item is material if knowledge of it would affect the decision of the informed users of the financial statements. Information is material if the omission or misstatement could iniluence the economic decision that users make on the basis of the financial statements. For example, small expenditures for tools are often expensed immediately rather than depreciated over their useful life to save on clerical costs of recording depreciation. In such a case, the effect on the financial statements is not large enough to affect economic decision, Another example is the common practice of large entities of rounding amounts to the nearest thousand pesos in theit financial statements. Small entities may round off to the nearest peso. 12 Scanned with CamScannerMateriality is a relativity Materiality of an j ‘y ite: absolute size. m depends on relative size rather than What is materi: i rial for one entity may be immaterial for another. An error of i 5 aes thei financial statements. of a critical for a small aatity, not be important but may be so Factors of materiality In the exercise of judgment in determining materiality, the following factors may be considered: a. Relative size of the item in relation to the total of the group to which the item belongs. For example, the amount of advertising in relation to total distribution costs, the amount of office salaries to total administrative expenses, the amount of prepaid expenses to total current assets and the amount of leasehold improvements to total property, plant and equipment. An item may be inherently material b. Nature of the item — : at ure it affects economic decision. because by its very nati For example, the discovery of a P20,000 bribe jis a material large entity. event even for a very Offsetting Assets and liabilities, and income and expenses, when material, ‘ h other. shall not be offset against eac! Offsetting may be done when it is required or permitted by another PFRS. Scanned with CamScannerExamples of offsetting Gains and losses on disposal of noncurrent Assets , reported by deducting from the proceeds the carrying ame of the assets and the related selling expenses, Unt, Expenditure related to a provision and reimbursed Under contractual arrangement with a third party may be netted against the related reimbursement. In other words, the expenditure related to a Provision ang any reimbursement from a third party can be offset, and only the net expenditure is presented as expense, In addition, gains and losses arising from a group of similar transactions are reported on a net basis. For example, foreign exchange gains and losses or Gains and losses arising from trading securities are netted against the other. However, if material, such gains and losses are reported separately. The measurement of assets net of valuation allowance is permitted because technically this is not offsetting. Thus, accounts receivable may be shown net of allowance for doubtful accounts, Frequency of reporting An entity shall present a complete set of financial statements at least annually, When an entity changes the end of the reporting period and presents financial statements for a period longer or shorter than one year, the entity shall disclose: a. The 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, 14 Scanned with CamScanneree Comparable information Except when : " Permitted or poo: entity shall disclose oom ne Wuited otherwise b PFRS, previous periog fe ee information in a t of an pv Ad " ral spect of period's financial statements *eported in the current In other words fe shall be. preac) i Jnana Statements of the current period ! mparati i statements of the ca diately mae aeaet of the financial Comparative informat; i aed ‘mation i descriptive carte shall be included for narrative and n when it is rele: of the current period's financial ae ae natertending For sean details of a legal dispute, the outcome of which was uncertain at the end of the preceding reporting period and is yet to be resolved, are disclosed in the current period. Users shall benefit from information that an uncertainty existed at the end of the immediately preceding reporting period, and steps have been taken during the current period to resolve the uncertainty. Third statement of financial position A third statement of financial position is required when an entity: a. Applies an accounting policy retrospectively. b. Makes retrospective restatement of items in the financial statements. Reclassifies items in the financial statements. an entity shall present three as ati Ch Under these circumstances, statements of financial position 1. The end of the current period 2. The end of the previous period e bet of the earliest co tive period 3. Th inning of th ii mparal ginning 15 Scanned with CamScannerConsistency of presentation Implicit in the presentation of i comparable informat;. principle of consistency, mation ig the The principle of consistency requires that t methods and practices shali be from period to period, he ae ‘ © accouns; applied on a uniform bart is The presentation and classification of financial Statem, § e items shall be uniform from one accounti i y ee unting period to the An entity cannot use the FIFO method of inventor: q é 'Y valu; in one year, the average method in the next year, are method in succeeding year and 50 on, If the FIFO method is adopted in one year, such method js followed from year to year. . Consistency is desirable and essential to achieve comparability of financial statements. However, consistency does not mean that no change in accounting method can be made. If the change will result to information that is faithfully represented and more relevant to the users of financial statements, then such change should be made, But there should be full disclosure of the change and the peso effect of the change. A change in the presentation and classification of items in the financial statements is allowed: When it is required by another PFRS. b. When a significant change in the nature of the operations of the entity will demonstrate a more appropriate revised presentation and classification. It is inappropriate for an entity to leave a unting polic S unchanged when better and acceptable alternatives exist. 16 — Scanned with CamScannerIdentification of financial statement: nts document, nation in the same published Each component of 7 the financi identified. he financial statements shall be clearly In addition, the following ; dusleyed: Wing information shall be prominently a. The name of the Yeporting entity. b. Whether the financi \ ‘ial statements e indivi atity oF 4 grog of nde s cover the individual c. The end of the reporting period or the period covered by the financial statements or notes. d. The presentation currency. e. The level of rounding used in the amounts in the financial statements. Financial statements are often made more understandable by presenting information in thousands or millions of units of the presentation currency. as the level of rounding in This is acceptable as long and relevant and material presentation is disclosed | information is not lost or omitted. 17 Scanned with CamScannerQUESTIONS 1. Define financial statements. 2, Explain general purpose financial statements, 38. What are the components of financial statements? 4. Explain the objective of financial statements, 5.To meet the objective of financial statements, what information is necessary? 6. Explain financial position, financial performance ang cash flows of an entity. 7. Explain financial reporting. 8. Explain the target users of financial reporting. 9. What is the objective of financial reporting under the Conceptual Framework for Financial Reporting? 10. What are the specific objectives of financial reporting? 11. What are the limitations of financial reporting? 12. Explain the responsibility for the preparation and presentation of financial statements. 13. What are the general features of financial statements? 14. Explain fair presentation of financial statements. 15. Specifically, what are the requirements of fair- presentation? 16. Explain the requirements when there is a departure from an accounting standard. 18 Scanned with CamScanner17. Explain going concern. 18. Explain accrual basis of accounting. 19. Explain materiality and aggregation. 20. When is an item material? 21. What are the factors in determining materiality? 99. Explain the rule on offsetting. 93, Explain the frequency of reporting financial statements. 24. What are the necessary disclosures when an entity presents financial statements for a period longer or shorter than one year? 25, Explain the requirement for comparable information. 26-What are the circumstances when three statements of financial position are required? 27. What is consistency of presentation? ntation and classification change in the prese ents allowed? 28, When is a e financial statem of items in th 29, What is identification of financial statements? 30. What information shall be prominently displayed in identifying financial statements? 19 Scanned with CamScannerPROBLEMS Problem 1-1 Multiple choice (PAS 1) 1. A complete set of financial statements includes all of th following components, except 6 a. Statement of financial position b.. Statement of changes in equity, c. Notes to financial statements d. Environmental reports and value added Statements 2. What is the objective of financial statements? a. To provide information about the financial Position, financial performance and changes in financia| position useful to a wide range of users b. To prepare a statement of financial position and statement of comprehensive income c. To present relevant, reliable, comparable and understandable information d. To prepare financial statements in accordance with all applicable standards 3. The primary responsibility for the preparation of the financial statements is reposed in a. Management of the entity b. Internal auditor c. External auditor d. Controller 4. The major financial statements include all, except a. Statement of financial position b. Income statement c. Statement of cash flows d. Statement of retained earnings 5. The major financial statements include all, except a. Statement of financial position b. Statement of changes in financial position c. Statement of comprehensive income d. Statement of changes in equity 20 "Scanned with CamScannerProblony My a ( , ' "| 1 When anon _ ONTY gy shorter (han ana yarn He oyun Hollow ings eae ns My eutity wall haul mi he wulion all of the wv Partod oay 1 Mhe van tte by Hie finns : ms " " el walng a iA Oe haterients, that an aes Atatome OU promunte 1 nant are not WEN wrewented in Ah financial (he titel that uty 7 compuenble wily en titi Mowhieh the entity operntens it 2 weouraphienl aren NVer Mane ie, Norton period 2 Which of the follows win ii oo , abatement? KOOL component of the finane a Statement Of financial position b. Statement of changes in equity 6. Report of board af director d, Noton to finaneial statements: a Whieh of the following financial statements? of # included in a complete a, A atatoment by the board of di with local legislation b. A statement of changes in equity ©. Statements of financial position for the last five years d. Value added statement lors of compliance h of the following is included within the financial statements? a. A statement of retained earnings b. Accounting, poli c. An auditor d, Board of dire arly identify ¢ shall clearly identifs e following, except tors’ report sh financial statement 5. An entit I and display all of thi [ 1 entity. » of the reporting en! «he’s Aes of major shareholders of the entity. c. The pr tation cur cy. Financial state d, Whether th finanel ate entity or 4 group of entities. the individual a1 Scanned with CamScanner¥ Ring fyi, Problem 1-3 Multiple choice (PAS 1) Which statement is incorrect concoy "presentation of financial statements? a. Fair presentation requires the faithful rep the effects of transactions and other events, b, Financial statements shall present fairly the fj position, financial performance and cash flow entity. c. In virtually all circumstances, a fair Presentation j, achieved by compliance with applicable PFRS. d. An entity whose financial statements comply with PFRS shall not make an explicit and unreserved statement of such compliance in notes. Fesentation Nancia) S of an 2. Which of the following cannot be considered faiy presentation of financial statements? a. To present information in a manner that provides relevant and faithfully represented financial information. b. To provide additional disclosures when compliance with specific PFRS is insufficient to understand the financial position and financial performance. c. To select and apply accounting policies in accordance with applicable PFRS. d. To rectify inappropriate accounting policies either by disclosure of the accounting policies used or by notes or explanatory information. 3. Which statement indicates a going concern? a. Management intends to liquidate the entity. b. Management intends to cease the operations of the entity. c. Management has no realistic alternative but to cease the operations of the entity, d. None of these would indicate going concern 22 Scanned with CamScanner4. An entity ig Permitted 0 standard if all of the followi i depart fro; i m. a a oe a particular NB conditions are satisfied In extremely rare Circumstances, a. b. When managem, the standart eal eee ae compliance with the departure from the ste, to achieve fair Presentation. d. When the Conceptual F Reporting Prohibits such he standard is necessary ramework for Financial a departure. 5. The effects of transactions and other events on economi¢ resources and claims are depicted in the periods in which those effects occur even if the resulting cash receipts and payments occur in a different period. Accrual accounting Cash accounting Modified accrual accounting Modified cash accounting Boop 6. Financial statements must be prepared at least Annually . Quarterly Semiannually Every two years as op Technically, offsetting in financial statements is accomplished when — a. The allowance for doubtful accounts is deducted from eceivable. ee b $e veumulated depreciation is deducted from ‘ipment. eal Paes canfeducted from total assets. a al ‘ from disposal of noncurrent asset is a ad sy deducting from the proceeds the cose reported Mae asset and the related disposal cost. amoun' ae 23 Scanned with CamScannertation and classification of items in 8. The presen I be retained from on © financial statements shall a Sceounting period to the next. a. Consistency of presentation b. Materiality c. Aggregation d. Comparability 9. A third statement of financial position as at beginning of the earliest comparative period presented is required a. When an entity applies an accounting Policy retrospectively. . b. When an entity makes a retrospective restatement of items in the financial statements. c. When an entity reclassifies items in the financial statements. d. Under all of these circumstances 10. Which statement in relation to financial statements in incorrect? a. General purpose financial statements do not and cannot provide all of the information that primary users need. b. General purpose financial statements are designed to show the value of the reporting entity. ¢, General purpose financial statements are intended to provide common information to users. d. Financial statements are largely based on estimate and judgment rather than exact depiction. 24 Scanned with CamScannerProblem 1.. i 1-4 Multiple choice (IFRS) 1. Items of dissimilar nature or functi es ‘unction ays be presen b. Must ted Mite be preceresented separately enter ce. d. Must be presented oe nately if material, 2. Materiality depends on The nature of the omissi i The absolute omission or misstatement. c. The relative ae of the omission or misstatement. misstatement judged in thee? of the omission or F in the surrounding ci S d. The judgment of Management ig circumstances. oe 3. An entity must disclose comparative information for a. The previous comparable period for all amounts. b. The previous comparable period for all amounts and for all narrative and descriptive information. c. The previous comparable period for all amounts 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. When the classification of items in the financial 4, statements is changed, the entity a. Must not reclassifiy the compare aiounis. : ose whether or not to reclassity. : : can te cyosily the comparative amounts unless it is ” impracticable to do so. a Must reclassify the current year amounts only. 5. An entity shall present rominently. ash flows more prominentl} ; fe of encial position more prominently. tatement more prominently. ; 1 statement with equal promin The stateme: The statemen The income §' Each financial ence. Boop 25 Scanned with CamScannerB Problem 1-5 Multiple choice (IAA) 1. The overall objective of financial reporting is to Provig information i That is useful for decision making About assets, liabilities and equity ‘About financial performance during a period That assesses performance of management Boop The objective of financial reporting is based on py The need for conservatism Reporting on management stewardship Generally accepted accounting principles The needs of the users of the information Be op 3. Which is an objective of financial reporting? Ta provide information that is useful in making investing and credit decisions. b. To provide information that is useful to management. c. To provide information to investors. d. To provide information about internal and external conflicts. 4, Which is an objective of financial reporting? a. To provide information useful to management. To identify nonfinancial transactions. c. To provide information useful to assess the amount, timing and uncertainty of prospective cash receipts. d. To provide information that excludes claims. op An objective of financial reporting is to provide a Information about the investors in the entity. Information about the liquidation value of the Information useful in assessing cash flow prospects Information that will attract new investors. a. b. entity c. a 26 Scanned with CamScannerProblem 1-6 Multiple choice (AICPA Adapted) 1. During a i i Z eae eoee an entity is under the direction of pees .mManagement, financial reporting will ly provide information about . . Entit t Mane eriormanca and management performance c. Entity performan formance but not entity performance a. Neith xrmance but not management performance er entity nor management performance 2. Financial reporting pertains to a. Individual business entities, rather than to industries or an economy or to members of society as consumers b. Individual business entities and an economy or to members of society as consumers c. Individual business entities and an economy rather’ than to industries or to consumers d. Individual business entities, industries and an economy rather than to members of society as consumers 3. Which is not an objective of financial reporting? Financial reporting shall provide information about a. resources, claims against resources and changes in them. b. Financial reporting shall provide information useful in evaluating stewardship of management. c. Financial reporting shall provide information useful in investment, credit and similar decision. d. Financial reporting shall provide information useful in assessing cash flow prospects. 4. Which is not an objective of financial reporting? a. To provide jnformation about assets and claims inst those assets . 7 daa ful in assessing cash flows b. To provide information use e 1 c. To provide jnformation useful in lending and investing decisions oo d. ‘To provide information about the liquidation value of an entity 27 Scanned with CamScannerProblem 1-7 Multiple choice (IAA) uld likely prepare the most accurate fing, Vhich wot — a x an entity based on empirical evidence? “"*ial s oe forecast fo a. Investors using statistical models b. Corporate management Financial analysts c. Independent certified public accountants d. What is the most useful information in predicting futuy cash flows? re Information about current cash flows Current earnings based on accrual accounting Information regarding the accounting policies useq Information regarding the results obtained by using a wide variety of accounting policies Beep The accrual basis of accounting is most useful for a. Determining the amount of income tax liability. b. Predicting short-term financial performance. c. Predicting long-term financial performance. d. Determining the amount of dividends to shareholders. In measuring financial performance, accrual accounting is used because a. Cash flows are considered less important. b. It provides a better indication of ability to generate cash flows than cash basis. c. It recognizes revenue when cash is received and expenses when cash is paid. d. It is one of the implicit assumptions. The financial statements prepared under GAAP a. Do not articulate with one another. b. Reflect a single measurement which is historical cost: c. Are not highly precise because estimate and judgme™ must be made. . d. Contain a limited number of future projections. 28 Scanned with CamScanner