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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

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Test Bank for Intermediate Accounting: IFRS Edition, 2e

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.

Statement of Financial Position and Statement of Cash Flows

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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—Conceptual Item 1. 2. 3. 4. 5. 6.

Ans. F T T F T F

Item 7. 8. 9. 10. 11. 12.

Ans. F T F T T F

Item 13. 14. 15. 16. 17. 18.

Ans. F T T F T F

Item 19. 20. 21. 22. 23. 24.

Ans. F T F T T F

Item 25. 26. 27. 28. 29. 30.

Ans. T T F F F T

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Test Bank for Intermediate Accounting: IFRS Edition, 2e

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

S

36.

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.

S

37.

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. d. failure to include items of financial value that cannot be recorded objectively.

Statement of Financial Position and Statement of Cash Flows P

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38.

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.

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Test Bank for Intermediate Accounting: IFRS Edition, 2e

46.

Which of the following is a current asset? a. Cash surrender value of a life insurance policy of which the company is the beneficiary. 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.

Statement of Financial Position and Statement of Cash Flows

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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

5-8 60.

Test Bank for Intermediate Accounting: IFRS Edition, 2e Fulton Company owns the following investments: Trading securities (fair value) Non-trading securities (fair value) Held-for-collection securities (amortized cost)

$70,000 35,000 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 Trademarks Long-term receivables

¥200,000 55,000 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) Non-trading securities (fair value) Held-for-collection securities (amortized cost)

£ 60,000 45,000 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 Trademarks Long-term receivables

R280,000 110,000 105,000

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.

Statement of Financial Position and Statement of Cash Flows

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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. d. Non-consolidated subsidiaries.

5 - 10 70.

Test Bank for Intermediate Accounting: IFRS Edition, 2e 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. b. c. d.

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. b. c. d.

72.

I, VI, IV, II, V, III VI, I, II, V, IV VI, I, IV, II, V III, VI, I, II, IV, V

I and A II and C III and B II and B

Presented below are data for Antwerp Corp. Assets, January 1 Liabilities, January 1 Equity, Jan. 1 Dividends Increase in share capital–ordinary Equity, Dec. 31 Net Income Equity at January 1, 2014 is a. € 504. b. € 560. c. €1,220. d. €1,724.

2014

2015

2016

€2,800 1,580 ? 560 504 ? 560

€3,360 ? ? 420 448 ? 448

? €2,016 2,100 476 500 1,596 ?

Statement of Financial Position and Statement of Cash Flows 73.

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Presented below are data for Bandkok Corp. Assets, January 1 Liabilities, January 1 Equity, Jan. 1 Dividends Increase in share capital–ordinary Equity, Dec. 31 Net Income

2014

2015

2016

Rp 5,400 3,440 ? 1,080 972 ? 1,080

Rp6,480 ? ? 810 864 ? 864

? Rp3,888 4,050 918 920 3,078 ?

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.

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Test Bank for Intermediate Accounting: IFRS Edition, 2e

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.

Statement of Financial Position and Statement of Cash Flows

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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 Cash used by investing activities Cash provided by financing activities Beginning cash balance What is Lohmeyer’s ending cash balance? a. $330,000. b. $400,000. c. $550,000. d. $620,000.

$250,000 110,000 140,000 120,000

5 - 14 90.

Test Bank for Intermediate Accounting: IFRS Edition, 2e Keisler Corporation reports: Cash provided by operating activities Cash used by investing activities Cash provided by financing activities Beginning cash balance

TL200,000 110,000 140,000 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 Depreciation expense Increase in accounts receivable

R$1,000,000 280,000 120,000

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 Depreciation expense Increase in accounts receivable

HK$750,000 210,000 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.

Statement of Financial Position and Statement of Cash Flows

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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 Purchased treasury shares Paid cash dividend Purchased equipment Issued ordinary shares

£764,00 0 160,000 380,000 212,000 588,000

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.

5 - 16 99.

Test Bank for Intermediate Accounting: IFRS Edition, 2e 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 Average current liabilities Average non-current liabilities Dividends declared Capital expenditures Payments of debt

€275,000 150,000 100,000 60,000 110,000 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 Average current liabilities Average non-current liabilities Dividends paid Capital expenditures Payments of debt Packard’s free cash flow is a. $70,000. b. $105,000.

$275,000 150,000 100,000 60,000 110,000 35,000

Statement of Financial Position and Statement of Cash Flows

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c. $165,000. d. $215,000. 105.

Pedigo Corporation reports the following information: Net cash provided by operating activities Average current liabilities Average non-current liabilities Dividends paid Capital expenditures Payments of debt

£225,000 150,000 100,000 60,000 110,000 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. d. All of these choices are correct.

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Test Bank for Intermediate Accounting: IFRS Edition, 2e

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.

P

113. 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 d. All of these are methods of disclosing pertinent information.

Statement of Financial Position and Statement of Cash Flows

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Multiple Choice Answers—Conceptual Item

31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43.

Ans.

d c b d d c b c a c d d b

Item

44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56.

Ans.

d d d d c b d b d b d d d

Item

57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69.

Ans.

d a d c a b d a b d b c b

Item

70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82.

Ans.

b c c c c c c c d b b a d

Item

83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95.

Ans.

Item

Ans.

Item

Ans.

c a d d d c b b a c c d a

96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108.

b b b d c b b a b a b d d

109. 110. 111. 112. 113. 114.

d d d c d 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.

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Test Bank for Intermediate Accounting: IFRS Edition, 2e

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.

Statement of Financial Position and Statement of Cash Flows

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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 next year or operating cycle.

1.____________________________________

2. Statement showing assets, liabilities, and equity at a point in time.

2.____________________________________

3. Probable future outflows of economic benefits.

3.____________________________________

4. Resources expected to be used, sold, or converted to cash in one year or the operating cycle, whichever is longer.

4.____________________________________

5. Tangible long-lived assets used in regular operations.

5.____________________________________

6. Economic rights or competitive advantages which lack physical substance.

6.____________________________________

7. Resources expected to provide future economic benefits.

7.____________________________________

8. Residual interest in the net assets of an entity.

8.____________________________________

Solution 5-116 1. 2. 3. 4.

Current liabilities. Statement of financial position. Liabilities. Current assets.

5. 6. 7. 8.

Property, plant, and equipment. Intangible assets. Assets. 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.

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Test Bank for Intermediate Accounting: IFRS Edition, 2e

Ex. 5-118—Account classification. a. b. c. d. e.

ASSETS Investments Plant and equipment Intangibles Other assets Current assets

f. g. h. i. j. k. l.

EQUITY AND LIABILITIES Share capital Share premium Accumulated comprehensive income Retained earnings Non-current liabilities Current liabilities 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. 2. 3. 4.

a d i k

5. 6. 7. 8.

j h l e

9. 10. 11. 12.

e j c k

Statement of Financial Position and Statement of Cash Flows

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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. 2. 3. 4.

a l j f

5. 6. 7. 8.

h g c k

9. 10. 11. 12.

k h e d

5 - 24

Test Bank for Intermediate Accounting: IFRS Edition, 2e

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 shareholders

Statement of Financial Position and Statement of Cash Flows

5 - 25

Solution 5-120 1. 2. 3. 4. 5.

j j b e e

6. 7. 8. 9. 10.

j g k e f

11. 12. 13. 14. 15.

k (e) (b) c j

16. 17. 18. 19. 20.

a a l j j

21. 22. 23. 24. 25.

f e c (c) 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. b. c. d. e.

Investments Plant and Equipment Intangible Assets Other Assets Current Assets

f. g. h. i.

Share Capital and Share Premium Retained Earnings Non-Current Liabilities Current Liabilities

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. _____ 12. Appropriation for bonded indebtedness.

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Test Bank for Intermediate Accounting: IFRS Edition, 2e

Solution 5-121 1. 2. 3. 4.

i a i d or e

5. 6. 7. 8.

c e e e

9. 10. 11. 12.

i x e 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. b. c. d.

Investments Plant and Equipment Intangible Assets Current Assets

e. f. g. h.

Share Capital and Share Premium Retained Earnings Non-current Liabilities 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.

Statement of Financial Position and Statement of Cash Flows

5 - 27

Solution 5-122 1. h 2. a 3. x

4. 5. 6.

(b) f x

7. 8. 9.

g d x

10.

h

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 2. c 3. a

4. 5. 6.

d d b

7. 8. 9.

a c a

10. 11. 12.

b c b

5 - 28

Test Bank for Intermediate Accounting: IFRS Edition, 2e

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 Buildings and equipment Accumulated depreciation— buildings and equipment Patents Accounts receivable Cash

$150,000 (50,000) 20,000 35,000 40,000 $195,000

Equity & Liabilities Share capital–ordinary Retained earnings Bonds payable Accounts payable

$ 65,000 60,000 50,000 20,000 $195,000

Hilton Company Statement of Cash Flows For the Year Ended December 31, 2015 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Increase in accounts receivable Increase in accounts payable Depreciation expense Gain on sale of equipment Amortization of patents Net cash provided by operating activities

$45,000 $(16,000) 8,000 15,000 (6,000) 2,000

Cash flows from investing activities Sale of equipment Purchase of land Purchase of buildings and equipment Net cash used by investing activities

12,000 (25,000) (48,000)

Cash flows from financing activities Payment of cash dividend Sale of bonds Net cash provided by financing activities

(15,000) 40,000

Net increase in cash Cash, January 1, 2015 Cash, December 31, 2015

3,000 48,000

(61,000)

25,000 12,000 28,000 $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

Statement of Financial Position and Statement of Cash Flows Solution 5-124 a. Current cash debt coverage

Net cash provided by operating activities = —————————————————— Average current liabilities $48,000 $48,000 = ——————————— = ———— = 3.0 : 1 ($12,000 + $20,000) ÷ 2 $16,000

b. Cash debt coverage

Net cash provided by operating activities = —————————————————— 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

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5 - 30

Test Bank for Intermediate Accounting: IFRS Edition, 2e

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 Equipment (net) Patents Inventories Accounts receivable (net) Cash

£ 76,300 96,000 32,000 57,000 52,200 80,000 £393,500

Equity Non-current liabilities Accounts payable

£215,500 100,000 78,000

£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.)

Statement of Financial Position and Statement of Cash Flows Solution 5-125 Kraus Company Statement of Financial Position As of December 31, 2015 Assets Investments Non-trading securities Cash surrender value of life insurance

£48,300 12,400

Property, plant, and equipment Equipment Less: Accumulated depreciation

135,000 40,000

Intangible assets Patents Franchises

£60,700 (5) 95,000

32,000 9,000

Current assets *Equipment held for sale Inventories Accounts receivable Less: Allowance for doubtful accounts Trading securities Cash Total current assets Total assets

£55,000 (2) 3,800

41,000

1,000 62,000

(4) (3)

51,200 19,000 70,100

(1) 203,300 £400,000

Equity and Liabilities Equity Non-current liabilities Current liabilities Accounts payable Bank overdraft Total current liabilities Total liabilities Total liabilities and equity (1) (2) (3) (4) (5) (6)

(£80,000 – £12,400 + £2,500) (£60,000 – £5,000) (£57,000 + £5,000) (£5,000 – £4,000) (£96,000 + £40,000 – £5,000 + £4,000) (£78,000 + £4,000)

*An alternative is to show it as an other asset.

£ 215,500 £100,000 £82,000 (6) 2,500 84,500 184,500 £400,000

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5 - 32

Test Bank for Intermediate Accounting: IFRS Edition, 2e

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 Interest Expense Interest Payable Retained Earnings Dividends Land Inventory Bonds Payable Notes Payable (due in 6 months) Share Capital–Ordinary Accumulated Depreciation - Equip. Prepaid Advertising Revenue Buildings Supplies Taxes Payable Utilities Expense Advertising Expense Salaries and Wages Expense Salaries and Wages Payable Accumulated Depr. - Buildings Cash Depreciation Expense

¥ 40,000 2,400 600 ? 50,400 157,320 102,000 78,000 24,400 60,000 10,000 5,000 351,400 80,400 1,860 3,000 1,320 1,560 53,040 900 15,000 40,000 8,000

Statement of Financial Position and Statement of Cash Flows

5 - 33

Solution 5-126 Leong Corporation Statement of Financial Position December 31, 2015 Assets Property, plant and equipment Land Buildings Accumulated depreciation - buildings Equipment Accumulated depreciation -equipment Total property, plant and equipment Current assets Inventory Supplies Prepaid advertising Cash Total current assets Total assets

¥157,320 ¥ 80,400 (15,000) 40,000 (10,000)

65,400 30,000 ¥252,720 102,000 1,860 5,000 40,000 148,860 ¥ 401,580

Equity & Liabilities Equity Share capital-ordinary Retained earnings (¥285,080*- ¥50,400) Total equity Non-current liabilities Bonds payable Current liabilities Notes payable Taxes payable Salaries and wages payable Interest payable Total current liabilities Total liabilities Total equity & liabilities

*¥351,400 - ¥53,040 - ¥8,000 - ¥2,400 - ¥1,560 - ¥1,320

¥60,000 234,680 ¥ 294,680 78,000 ¥ 24,400 3,000 900 600 28,900 106,900 ¥ 401,580

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Test Bank for Intermediate Accounting: IFRS Edition, 2e

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 Equipment............................................ 504,000 Inventory............................................... 173,000 Accounts receivable (net)..................... 84,000 Cash..................................................... 32,000 TOTAL....................................... €856,800

€

21,000 789,600 201,600 151,200 63,000 €1,226,400

Share capital–ordinary.......................... €420,000 Retained earnings................................. 67,200 Notes payable - Long-term................... 168,000 Notes payable - Short-term (trade)....... 67,200 Accounts payable................................. 50,400 Accumulated depreciation..................... 84,000 TOTAL....................................... €856,800

€ 487,200 205,800 302,400 29,400 86,000 115,600 €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.

Statement of Financial Position and Statement of Cash Flows Solution 5-127 Stanislaus Co. Statement of Cash Flows For the year ended December 31, 2016 Net Income Cash flow from operating activities Depreciation expense Increase in accounts receivable Increase in inventory Increase in accounts payable Decrease in short-term notes payable Net cash provided by operating activities Cash flow from investing activities Purchase equipment Sale of land Net cash used by investing activities Cash flow from financing activities Payment of cash dividend Net increase in cash Cash at beginning of year Cash at end of the year

€215,200 €31,600 (67,200) (28,600) 35,600 (37,800)

(66,400) 148,800

(84,000) 42,800 (41,200) (76,600) 31,000 32,000 €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

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Test Bank for Intermediate Accounting: IFRS Edition, 2e

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 Retained Earnings Total Equity

HK$ 510,000 374,000 884,000

HK$ 467,500 340,000 807,500

Non-Current Liabilities: Bonds Payable

340,000

391,000

Current Liabilities: Accounts Payable Notes Payable Income Taxes Payable Total Current Liabilities

187,000 51,000 85,000 323,000

102,000 68,000 76,500 246,500

Total Liabilities

663,000

637,500

Total Liabilities & Equity

HK$1,547,000

HK$1,445,000

Sales Revenue Less Cost of Goods Sold Gross Profit Expenses: Depreciation Expense Salaries and Wages Expense Interest Expense Loss on Sale of Equipment Income Before Taxes Less Income Tax Expense Net Income

HK$1,615,000 731,000 884,000

HK$1,513,000 731,000 782,000

153,000 391,000 34,000 17,000 289,000 119,000 HK$ 170,000

136,000 357,000 34,000 0 255,000 102,000 HK$ 153,000

Additional Information:

Statement of Financial Position and Statement of Cash Flows

5 - 37

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.

5 - 38

Test Bank for Intermediate Accounting: IFRS Edition, 2e

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 Net cash provided by operating activities

263,500 433,500

Cash flow from investing activities Sale of equipment Purchase of equipment Net cash used by investing activities

(255,000)

Cash flow from financing activities Retirement of bonds payable Issuance of ordinary shares Payment of dividends Net cash used by financing activities Net increase in cash Beginning cash Cash at end of year

17,000 (272,000)

(51,000) 42,500 (136,000)** (144,500) 34,000 119,000 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