Acctng 2 – Conceptual Framework & Accounting Standards

Activity #6 – Preparation of FS

Name: Hayna Marie D. Aguilar Program: BSA-1B Date: March 19, 2021

1. What is the basic purpose of a statement of financial position?

The basic purpose of a statement of financial statement is to provide information
about the financial position, performance and cash flows of an enterprise that is useful to
a wide range of users in making economic decisions.

2. What is a statement of financial position? Why it is dated differently than the income
statement and the statement of cash flows?
Statement of financial position is also known as balance sheet. Statement of
financial position shows the asset, liabilities and equity or shareholder’s equity of a
business at specific period of time.
Dates between Statement of financial position and income statement and cash
flows differ in terms of how the balance sheet and income statement of the current
accounting cycle. While values of assets, liabilities and equity in the balance sheets are
accumulated over time on a counting basis. Balance sheet values at any date are the
balance sheet values at the prior date plus any increase and minus any decreases but
income statement amounts of any period are independent of those from any other periods.

3. Explain the relation between the statement of financial position and full disclosure.
The full disclosure states that all relevant and necessary information for the
understanding of a company’s financial statements must be included in public company
filings. The more complete information disclosed in the notes to the financial statement,
the financial report readers will increasingly understand the company’s financial position.

4. Define current assets and current liabilities and emphasize their interrelationship.
Current Asset expects to realize the asset or intends to sell or consume it in its
normal operating cycle or within a year. It is expected to be realized within 12 months
after balance sheet date. While Current Liabilities, if asset is expected to be realized,
current liabilities expected to be settled in the normal course of the operating cycle. It is
held primarily for the purpose of being traded. It must be settled within 12 months in
balance sheet date.

5. Distinguish between current and non-current liabilities. Under what conditions a non-
current liability amount would be reclassified as current liability?
Current liabilities is an obligation due to be paid or performance within one year
or within the normal operating cycle, whichever is longer and non-current liabilities
provide on a long-term basis and are not due for settlement within 12 months after the
reporting period.
Liabilities reclassifies as current when an entity breaches a provision of a long-
term loan arrangement on or before the end of the reporting period with the effect that the
liability become payable in demand.
6. What is shareholder’s equity? What are the main components of shareholders’ equity?
Shareholder’s equity is the residual interest after deducting the total liabilities
from total asset of a company. The main components of shareholder’s equity are capital
and reserves that classified into paid-in capital, share premium and reserves.

7. What is a restriction, or appropriation, of retained earnings? How are restrictions and

appropriations reported?
Appropriated retained earnings are retained earnings that have been set aside by
action of the board of directors for a specific use. It can be used for many purposes,
including acquisitions, debt and reduction. Appropriated retained earnings do not have
the force of law.
The accounting restricted or appropriated retained earnings is to move the
designated amount into a restricted retained earnings account, which is still part of the
equity cluster of general ledger accounts. In reporting in a balance sheet, the amount of
any restricted retained earnings should be stated separately as a line item, and should be
stated in the disclosures that accompany the financial statements.

8. How are current assets defined and what are the major items that may be included in
current assets? How are current liabilities defined? Give three examples of such
liabilities.
Current asset are all the assets of a company that are expected to be sold or used
as a result business operation over the next year. Current Asset includes, cash and cash
equivalents, accounts receivable, stock inventory, marketable securities, pre-paid
liabilities and other liquid assets. Current liabilities are a company’s short-term financial
obligations that are due within one year or within a normal operating cycle. Current
Liabilities includes, notes payable, Interest payable, short term loans, and accrued
expenses.

9. What items are classified as long-term liabilities?

Long-term obligations are financial obligations of a company that are due more
than one year in the future. Long-term obligations includes long-term loans, deferred tax
liabilities and pension obligations.

10. Define the following terms:

a. Share capital – is the amount invested by a company’s shareholders for use in the
business. It is the amount of money a company rises by issuing common or
preferred stock.
b. Additional paid-in capital in excess of par – the amount for share capital above its
par value. It is commonly known as the contributed capital in excess of par or
share premium.
c. Treasury share – or treasury stock is the previously outstanding share that is
bought back from stockholders by issuing the company. The shares are issued but
no longer outstanding and not included in the distribution of dividends.
d. Accumulated profit and losses – it is the sum of a company’s profits and losses
left, after the dividend is paid.
 e. Deficit – deficit occur when the company’s debts are more than its profit. It shows
a negative balance between these two.
f. Accumulated other comprehensive income – includes unrealized gains and losses
reported in the equity section of the balance sheet that are net below retained
earnings. It can consists of gains and losses on certain types of investments,
pension, plans and hedging transactions.

11. What are investments by owners? Distribution to owners? In what statement do many
companies report these items?
Investment by owners is the amount of assets that the owner puts into the business
or company. In other words, this is the amount of money or other assets that the owner
contributes to the business either to start it up or for additional investment. Distribution to
owners is payment of earnings to owners of a business organization in the form of a
dividend. A dividend is a share of profits and retained earnings, if profit is generated and
accumulates retained earnings, those earnings can be paid out to shareholders as a
dividend. Equity and reserves show the money that has been invested by the owners and
distribute by the owners.

12. Explain the basic difference between revenues and gains.

The primary difference between revenue and gains is that revenue is money
generated through primary business activities, whereas gains are achieved if the current
price of something is higher than the original purchase price.

13. Explain the basic difference between expenses & losses.

The main difference between expenses and losses is that expenses are incurred in
order to generate revenues, while losses are related to essentially any other activity.
Another difference is that expenses are incurred much more frequently than losses, and in
much mire transactional volume.

14. What is the purpose of the statement of cash flow?

The basic purpose of the statement of cash flows is to provide information about
cash receipts, cash payments, and net change in cash resulting from the operating,
investing, and financing activities of a company during the period.
15. Explain the three major captions in the statement of cash flows.
The three major captions in the statement of cash flows are operating, investing,
and financing activities.
 Operating Activities – includes the production, sales, and delivery of the
company’s product as well as collecting payments from its customers. Example,
purchasing raw materials, building inventory, advertising, and shipping the
product.
 Investing Activities – are purchases or sales of assets including land, equipment,
building and marketable securities, and loans made to suppliers or received from
customers and payments related to mergers and acquisition.
 Financing Activities – include the inflow and cash from investors, such as banks
and shareholders and the outflow of cash to shareholders as dividends as the
company generates income.