Professional Documents
Culture Documents
OVERVIEW
Statement of Financial Position, also known as the Balance Sheet, presents the financial position of an
entity at a given date. It is comprised of three main components: Assets, liabilities and equity.
Statement of Financial Position helps users of financial statements to assess the financial soundness of
an entity in terms of liquidity risk, financial risk, credit risk and business risk.
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.
LEARNING ACTIVITIES
Statement of Financial Position, also referred to as the balance sheet:
1. Reports assets, liabilities, and equity at a specific date.
2. Provides information about resources, obligations to creditors, and equity in net
resources.
3. Helps in predicting amounts, timing, and uncertainty of future cash flows.
Usefulness
Computing rates of return.
Evaluating capital structure.
Assess risk and future cash flows.
Analyze company’s:
Liquidity
Solvency
Financial flexibility
Limitations
Most assets and liabilities are reported at historical cost.
Use of judgments and estimates.
Cash
Generally any monies available “on demand.”
Cash equivalents - short-term highly liquid investments that mature within
three months or less.
Restrictions or commitments must be disclosed.
Short-Term Investments
Portfolio Type Valuation Classification
Held-to-maturity Debt Amortized cost Noncurrent
Trading Debt or Equity Fair value Current
Available-for- Debt or Equity Fair value Noncurrent
sale
Inventories
Disclose:
Basis of valuation (e.g., lower-of-cost-or-net realizable value).
Cost flow assumption (e.g., FIFO or average).
Prepaid Expenses
Payment of cash, that is recorded as an asset because service or benefit will be
received in the future.
Prepayments often occur in regard to:
insurance
supplies
advertising
rent
maintenance on equipment
Non-Current Assets
Generally consists of:
Long-term Investments
Property, Plant, and Equipment
Intangibles Assets
Other Assets
Long-term Investments
1. Securities (bonds, ordinary shares, or long-term notes).
2. Tangible assets not currently used in operations (land held for
speculation).
3. Special funds (sinking fund, pension fund, or plant expansion fund.
4. Non-consolidated subsidiaries or associated companies.
Other Assets
Items vary in practice. Can include:
Long-term prepaid expenses
Non-current receivables
Assets in special funds
Property held for sale
Restricted cash or securities
Current Liabilities
Obligations that a company generally expects to settle in its normal operating
cycle or one year, whichever is longer. This concept includes:
1. Payables resulting from the acquisition of goods and services:
accounts payable, wages payable, and so on.
2. Collections received in advance for the delivery of goods or
performance of services, such as unearned rent revenue.
3. Other liabilities whose liquidation will take place within the
operating cycle or one year.
Non-Current Liabilities
Obligations that a company does not reasonably expect to liquidate within the
longer of one year or the normal operating cycle. Three types:
1. Obligations arising from specific financing situations.
2. Obligations arising from the ordinary operations of the company.
3. Obligations that depend on the occurrence or non-occurrence of
one or more future events to confirm the amount payable, or the
payee, or the date payable.
Equity
Equity
Ordinary shares and preference shares - must disclose the par value
and the authorized, issued, and outstanding amounts.
Share premium - company usually presents one amount for ordinary
and preference shares.
Retained earnings - amount may be divided between the
unappropriated and restricted amounts.
Treasury shares - shown as a reduction of equity.
Analysts and other interested parties can gather qualitative information from
financial statements by examining relationships between items on the statements
and identifying trends in these relationships.
Multiple Choice
Identify the choice that best completes the statement or answers the question.
1. Which of the following should be disclosed in the financial statements as contingent liability?
a. The entity has accepted liability prior to year-end for unfair dismissal of an employee and is to pay
damages.
b. The entity has received a letter from a supplier complaining about an old unpaid invoice.
c. The entity is involved in a legal; case which it may possibly lose, although this is not probable.
d. The entity has not yet paid claims under sales warranties.
2. A retail store received cash and issued a gift certificate that is redeemable in merchandise. When the gift
certificate was issued, a
a. Deferred revenue account should be decrease
b. Deferred revenue account should be increase
c. Revenue account should be decreased
d. Revenue account should be increase
3. Which of the following must be included on the face of statement of financial position?
a. Number of shares authorized
b. Contingent Asset
c. Contingent Liability
d. Investment Property
9. These are probable future economic benefits obtained or controlled by an entity as a result of
past transactions or events.
a. Liabilities
b. Assets
c. Equity
d. None of the above
10. Which of the following should not be considered as a current asset in the balance sheet?
a. Installment notes receivable due over 18 months in accordance with normal trade practice.
b. Prepaid taxes which cover assessments of the following operating cycle of the business.
c. Equity or debt securities purchased with cash available for current operations.
d. The cash surrender value of a life insurance policy carried by a corporation, the beneficiary,
on its president.
12. What is the appropriate treatment for a contingent asset in the financial statements of an entity?
a. Disclosure of information in the notes but not recognized in the financial
statements.
b. Recognition in the financial statements and a note disclosure.
c. Recognition in the financial statements but no further disclosure in the notes.
d. Not recognized in the financial statements and neither disclosed in notes.
13. If an entity expects and has the discretion to refinance on a long-term basis, the notes payable
should be reclassified as
a. Current Liabilities
b. Noncurrent Asset
c. Non-current Liabilities
d. Current liabilities
17. Which of the following is not a component of contributed capital under equity section?
a. Ordinary shares
b. Treasury shares
c. Preference share
d. Share premium
18. The trading securities and other investments in quoted equity instrument is an example of what
line item under current assets?
a. Financial assets at fair value
b. Financial assets at book value
c. Other current assets
d. Noncurrent assets
19. Which is not true about the Statement of Financial Position in the given choices?
a. Biological Assets should be reported in the statement of financial position
b. The number of shares authorized for issue should be reported in the statement of
financial position or the statement of changes in equity or in the notes
c. Provision should be recognized in the statement of financial position
d. A revaluation surplus on a noncurrent asset in the current year should be recognized in
the income statement
20. The analysis of the statement of financial position is useful in assessing the liquidity, which is
the ability to
a. Satisfy short-term obligations.
b. Maintain profitable operations.
c. Maintain past levels of preferred and ordinary dividends
d. Survive major economic downturn.
Module 4 Post-test Set B
BALANCE SHEET
Multiple Choice
Identify the choice that best completes the statement or answers the question.
How much current assets should be shown in the balance sheet on December 31, 2021?
a. 7,900,000
b. 8,000,000
c. 7,400,000
d. 7,700,000
3. At year-end, the current assets of Hazel Company revealed cash and cash equivalents of
P700,000, accounts receivable of P1,200,000 and inventories of P600,000. The examination of
accounts receivable disclosed the following:
4. Kaila Company trial balance reflected the following account balances at December 31, 2021:
Accounts receivable 1,600,000
Trading securities 500,000
Accumulated depreciation on equipment and furniture 1,500,000
Cash 1,100,000
Inventory of merchandise 3,000,000
Equipment and furniture 2,500,000
Patent 400,000
Prepaid expenses 100,000
Land held for future business site 1,800,000
In Kaila Company’s December 31, 2021 balance sheet, the current assets total is
a. 8,100,000
b. 7,300,000
c. 6,700,000
d. 6,300,000
In its June 30, 2021 balance sheet, what amount should Kaila report as current assets?
a. 2,250,000
b. 2,050,000
c. 1,950,000
d. 1,250,000
6. Presented below are account balances and related information on December 31, 2021 for
Jerome Company:
Cash and cash equivalents 3,700,000
Accounts receivable 1,500,000
Allowance for doubtful accounts ( 200,000)
Inventory 2,000,000
Prepaid insurance 300,000
7,300,000
The cash and cash equivalents include the following:
Cash in bank, net of bank overdraft of P300,000
Maintained in a separate bank 1,000,000
Cash set aside by the Board of Directors for the
Purchase of a plant site 2,000,000
Petty cash 10,000
Cash withheld from wages for income tax of employees 190,000
General cash 500,000
3,700,000
========
The accounts receivable balance includes past due account in the amount of P100,000 on
which a loss of 50% is anticipated. The account should be written off.
The merchandise inventory includes goods held on consignment amounting to P150,000
and goods of P200,000 purchased and received on December 31, 2021. Neither of these
items have been recorded as a purchase.
The prepaid-insurance includes cash surrender value of life insurance of P50,000.
7. Jerome Company’s December 31, 2021 balance sheet reported the following current assets:
Cash 4,000,000
Accounts receivable 7,500,000
Inventory 4,000,000
Deferred tax asset 1,200,000
Equipment used and held for resale 300,00
17,000,000
An analysis of the accounts receivable disclosed the accounts receivable comprised
the following
Trade accounts receivable 5,000,000
Allowance for doubtful accounts (500,000)
Selling price of Jerome Company’s unsold goods sent to Tar
Company on consignment at 150% of cost and excluded from
Jerome’s ending inventory 3,000,000
7,500,000
8. The following trial balance of Jerome Company at December 31, 2021 has been adjusted
except for income tax expense:
Cash 2,000,000
Accounts receivable, net 20,000,000
Prepaid taxes 4,000,000
Inventory 12,000,000
Property, plant & equipment 35,000,000
Accounts payable 20,000,000
Common stock 30,000,000
Retained earnings 18,000,000
Foreign currency translation adjustment 5,000,000
Revenues 40,000,000
Expenses 30,000,000
108,000,000 108,000,000
During 2021, estimated tax payments of P4,000,000 were charged to prepaid taxes. Jerome
has not yet recorded income tax expense. The tax rate is 35%. Included in accounts receivable
is P6,000,000 due from a customer. Special terms granted to this customer require payment in
equal semiannual installments of P1,000,000 every June 1 and December 1.
In the December 31, 2021 balance sheet, what amount should be reported as total current
assets?
a. 34,500,000
b. 28,500,000
c. 35,500,000
d. 30,500,000
How much should be presented as total current liabilities on the balance sheet?
a. 6,700,000
b. 6,600,000
c. 7,100,000
d. 7,700,000
10. The trial balance of Joshtine Company reflected the following liability account balances at
December 31, 2021:
Accounts payable 1,900,000
Bonds payable 3,400,000
Deferred tax liability 400,000
Dividends payable 500,000
Income tax payable 900,000
Note payable, due January 31, 2022 600,000
Discount on bonds payable 200,000
The deferred tax liability is based on temporary differences that will reverse equally in 2022 and
2023.
In Joshtine’s December 31, 2021 balance sheet, the current liabilities total was
a. 7,100,000
b. 4,300,000
c. 3,900,000
d. 4,100,000
11. The trial balance of Angel Company reflected the following liability account balances on
December 31, 2021:
Accounts payable 5,000,000
Bonds payable, due December 30, 2022 10,000,000
Premium on bonds payable 500,000
Deferred tax liability 2,500,000
Dividends payable 4,500,000
Income tax payable 1,500,000
Note payable – bank 4,000,000
The bank note payable matures on June 30, 2022. On March 1, 2022, the entire balance of the
bank payable was refinanced on a long-term basis. Angel’s financial statements were issued on
March 31, 2022.
In its December 31, 2021, Angel Company should report current liabilities at
a. 21,500,000
b. 24,000,000
c. 25,500,000
d. 28,000,000
12. The following information about Manchester Company is available at December 31, 2021:
Employee income taxes withheld 900,000
Cash balance at first state Bank 2,500,000
Cash overdraft at Harbor Bank 1,300,000
Accounts receivable with credit balance 750,000
Estimated expenses of meeting warranties on merchandise
previously sold 500,000
Estimated damages as a result of unsatisfactory performance on a
contact 1,500,000
Accounts payable 3,000,000
Deferred serial bonds, issued at par and bearing interest at 12%,
payable in semiannual installments of P500,000 due April 1 and
October 1 of each year, the last bond to be paid on October 1,
2027. Interest is also paid semiannually. 5,000,000
Stock dividend payable 2,000,000
The December 31, 2021 balance sheet should report current liabilities at
a. 8,100,000
b. 7,950,000
c. 9,100,000
d. 7,350,000
13. Joshtine Company had the following liabilities at December 31, 2021:
Account payable 550,000
Unsecured note, 8%, due July 1, 2022 4,000,000
Accrued expenses 350,000
Contingent liability 450,000
Deferred tax liability 250,000
Senior bonds, 7%, due March 31, 2022 5,000,000
The contingent liability is an accrual for possible loss on a P1,000,000 lawsuit filed against
Joshtine. Joshtine’s legal council expects the suit to be settled in 2022 and has estimated that
Joshtine will be liable for damages in the amount of 450,000
The deferred tax liability is not related to an asset for financial reporting and is expected to
reverse in 2022
What amount should Joshtine report in its December 31, 2021 balance sheet for current
liabilities?
a. 10,350,000
b. 10,150,000
c. 9,900,000
d. 4,900,000
15. The following information pertains to Kaila Company on December 31 of the current year:
Property, plant and equipment 35,000,000
Accounts receivable 20,000,000
Prepaid insurance 2,500,000
Short-term note payable 3,000,000
Cash 5,000,000
Bonds payable 40,000,000
Total assets 101,500,000
Land 20,000,000
Accounts payable 8,000,000
Allowance for doubtful accounts 1,000,000
Merchandise inventory 13,000,000
Available for sale securities – to be held indefinitely 7,000,000
Wages payable 2,000,000
Total liabilities 56,000,000
Premium on bonds payable 3,000,000
16. Rosalie Corporation is located in London but does business throughout Europe. The company
builds and sells equipment used in manufacturing pharmaceuticals. On December 31, 2021,
Rosalie has trading securities valued at £42,000; goodwill valued at £300,000; prepaid
insurance valued at £24,000; patents valued at £140,000; and a customer list valued at
£260,000. On Rosalie Corporation’s statement of financial position at December 31, 2021, what
amount should be reported as intangible assets?
a. 742,000
b. 766,000
c. 700,000
d. 440,000
17. The accounts and balances shown below were taken from Kaila Company’s trial balance on
December 31, 2021. All adjusting entries have been made.
How much should be reported in Kaila’s December 31, 2021 balance sheet as current and non-
current assets, respectively?
a. 1,650,000 and 2,375,000
b. 1,650,000 and 3,395,000
c. 1,800,000 and 2,225,000
d. 1,800,000 and 3,795,000
18. Jostin Company’s adjusted trial balance at December 31, 2021 includes the following accounts
balances:
What amount should Jostin report as total owners’ equity in its December 31, 2021 balance
sheet?
a. 8,400,000
b. 8,900,000
c. 9,150,000
d. 9,200,000
19. Facundo Corporation’s post-closing trial balance at December 31, 2021 was as follows:
Facundo Corporation
Post-Closing Trial Balance
December 31, 2021
Debit Credit
Accounts payable P 495,000
Accounts receivable P 963,000
Reserve for depreciation 360,000
Reserve for doubtful accounts 54,000
Premium on ordinary shares 1,800,000
Gain on sale of treasury shares 450,000
Bonds payable 720,000
Building and equipment 1,980,000
Cash 396,000
Dividends payable on preference shares 7,200
Ordinary share capital (P1 par value) 270,000
Inventories 1,116,000
Land 684,000
Available-for-sale securities at fair value 513,000
Trading securities at fair value 387,000
Net unrealized loss on available-for-sale
securities 45,000
Preference share capital (P50 par value) 900,000
Prepaid expenses 72,000
Donated capital 800,000
Share warrants outstanding 208,000
Retained earnings 415,800
Treasury shares – ordinary, at cost 324,000
Totals P6,480,000 P6,480,000
At December 31, 2021, Facundo had the following number of ordinary and preference shares:
Ordinary Preference
Authorized 900,000 90,000
Issued 270,000 18,000
Outstanding 252,000 18,000
The dividends on preference shares are P0.40 cumulative. In addition, the preference share
has a preference in liquidation of P50 per share.
Based on the above and the result of your audit, determine the following as of December 31,
2021:
4. Total equity
a. P4,266,800 c. P4,888,800
b. P4,519,800 d. P4,474,800
20. Tricia Industries provided the following balances on December 31, 2021
Accounts payable 1,400,000
Accrued taxes 55,000
Ordinary share capital 7,700,000
Dividends – ordinary share 4,400,000
Dividends – preference share 1,600,000
Mortgage payable ( 500,000 due in 6 months) 6,000,000
Notes payable, due on January 14, 2023 2,300,000
Preference share capital 3,250,000
Premium on notes payable 125,000
Income summary – credit balance 9,090,000
Retained earnings – January 1 8,080,000
Unamortized issue cost on note payable 65,000
Unearned rent income 35,000