CHAPTER 5
Statement of Financial Position and Statement of Cash Flows
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
Brief
Exercises
Exercises
Problems
Concepts
for Analysis
1.
2.
Classification of items
in the statement of
financial position and
other financial
statements.
11, 12, 13,
14, 15, 16,
18, 19
1, 2, 3, 4, 5,
6, 7, 8, 9,
10, 11
1, 2, 3, 8,
9, 10
1, 2
Disclosure principles,
uses of the statement
1, 2, 3, 4, 5,
6, 7, 10, 18,
3, 4
3.
Preparation of
statement of financial
position; issues of
format, terminology,
and valuation.
4, 7, 8, 9,
16, 17, 20
4, 5, 6, 7,
11, 12, 17
1, 2, 3, 4,
5, 6, 7
2, 3, 4, 5
Statement of cash
flows.
21, 22, 23,
24, 25, 26,
27, 28
12, 13, 14,
15, 16
13, 14, 15,
16, 17, 18
6, 7
6
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Questions
Brief
Exercises
Exercises
Problems
Concepts
for
Analysis
1. Explain the uses, usefulness
limitations, and content of the
statement of financial
position.
1, 2, 3, 4, 5,
6, 7, 8, 9,
11, 12, 13,
14, 15, 16,
17, 18, 19
1, 2, 3, 4, 5,
6, 7, 8, 9,
10, 11
1, 2, 3, 4, 5
6, 7, 8, 9,
10, 11, 12,
17
2, 3, 4, 5,
6, 7
2, 3
3. Explain the purpose, content,
and presentation of the
statement of cash flows.
21, 22, 23,
24, 25, 26,
27, 28
12, 13, 14,
15, 16
13, 14, 15,
16, 17, 18
6,7
4, 5, 6
of information provided.
29, 30
18
6, 7
ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
Time
(minutes)
E5.1
Statement of financial position classifications.
Simple
15–20
E5.2
Classification of statement of financial position accounts.
Simple
15–20
E5.3
Classification of statement of financial position accounts.
Simple
15–20
E5.4
Preparation of a classified statement of financial position.
Simple
30–35
E5.5
Preparation of a corrected statement of financial position.
Simple
30–35
E5.6
Corrections of a statement of financial position.
30–35
E5.7
Current assets section of the statement of financial position.
Moderate
15–20
E5.8
Current vs. non-term liabilities.
Moderate
10–15
E5.9
Current assets and current liabilities.
30–35
E5.10
Current liabilities.
Moderate
15–20
E5.11
Statement of financial position preparation.
Moderate
25–30
E5.12
Preparation of a statement of financial position.
Moderate
30–35
E5.13
Statement of cash flows—classifications.
Moderate
15–20
E5.14
Preparation of a statement of cash flows.
Moderate
25–35
E5.15
Preparation of a statement of cash flows.
Moderate
25–35
E5.16
Preparation of a statement of cash flows.
Moderate
25–35
E5.17
Preparation of a statement of cash flows and a
statement of financial position.
30–35
E5.18
Preparation of a statement of cash flows, analysis.
Moderate
25–35
P5.1
Preparation of a classified statement of financial position,
periodic inventory.
Moderate
30–35
P5.2
Statement of financial position preparation.
Moderate
35–40
P5.3
Statement of financial position adjustment and preparation.
Moderate
40–45
P5.4
Preparation of a corrected statement of financial position.
40–45
P5.5
Statement of financial position adjustment and preparation.
40–50
P5.6
Preparation of a statement of cash flows and
a statement of financial position.
35–45
P5.7
Preparation of a statement of cash flows and
a statement of financial position.
40–50
CA5.1
Reporting the financial effects of varied transactions.
Moderate
20–25
CA5.2
Current asset and liability classification.
Moderate
20–25
CA5.3
Identifying statement of financial position deficiencies.
Moderate
20–25
CA5.5
Presentation of property, plant, and equipment.
Simple
20–25
CA5.6
Cash flow analysis.
40–50
ANSWERS TO QUESTIONS
1. The statement of financial position provides information about the nature and amounts of
investments in enterprise resources, obligations to enterprise creditors, and the owners’ equity in net
2. Solvency refers to the ability of an enterprise to pay its debts as they mature. For example, when a
company carries a high level of long-term debt relative to assets, it has lower solvency. Information
3. Financial flexibility is the ability of an enterprise to take effective actions to alter the amounts and
timing of cash flows so it can respond to unexpected needs and opportunities. An enterprise with a
4. Some situations in which estimates affect amounts reported in the statement of financial position
include:
(a) allowance for doubtful accounts.
(b) depreciable lives and estimated residual values for plant and equipment.
5. An increase in inventories increases current assets, which is in the numerator of the current ratio.
Therefore, inventory increases will increase the current ratio. In general, an increase in the current
ratio indicates a company has better liquidity, since there are more current assets relative to
6. Liquidity describes the amount of time that is expected to elapse until an asset is converted into
cash or until a liability has to be paid. The ranking of the assets given in order of liquidity is:
(1) (d) Short-term investments.
Questions Chapter 5 (Continued)
7. The major limitations of the statement of financial position are:
(a) The values stated are generally historical and not at fair value.
8. Some items of value to companies such as Louis Vitton or adidas are the value of research and
development (new products that are being developed but which are not yet marketable), the value
of the “intellectual capital” of its workforce (the ability of the companies’ employees to come up with
new ideas and products in the changing industries), and the value of the company reputation or
9. Classification in financial statements helps users by grouping items with similar characteristics and
separating items with different characteristics. Current assets are expected to be converted to
10. Separate amounts should be reported for accounts receivable and notes receivable. The amounts
should be reported gross, and an amount for the allowance for doubtful accounts should be
11. No. Non-trading equity securities should be reported as a current asset only if management
expects to convert them into cash as needed within one year or the operating cycle, whichever is
12. The relationship between current assets and current liabilities is that current liabilities are those
13. The total selling price of the season tickets is £20,000,000 (10,000 X £2,000). Of this amount,
£8,000,000 has been earned by 12/31/19 (8/20 X £20,000,000). The remaining £12,000,000
Questions Chapter 5 (Continued)
14. Working capital is the excess of total current assets over total current liabilities. This excess is
sometimes called net working capital. Working capital represents the net amount of a company’s
15. (a) Equity. “Treasury shares (at cost).”
Note: This is a reduction of total equity.
(b) Current Assets. Included in “Cash.”
(c) Investments. “Land held as an investment.”
16. (a) Allowance for doubtful accounts should be deducted from accounts receivable in current
assets.
(b) Inventory held on consignment should not appear on the consignee’s statement of financial
position except possibly as a note to the financial statements.
17. (a) Trade accounts receivable should be stated at their estimated amount collectible, often
referred to as net realizable value. The method most generally followed is to deduct from the
total accounts receivable the amount of the allowance for doubtful accounts.
Questions Chapter 5 (Continued)
18. Assets are defined as probable future economic benefits obtained or controlled by a particular
entity as a result of past transactions or events. If a building is leased under a finance or capital
19. Battle is incorrect. Retained earnings is a source of assets, but is not an asset itself. For example,
even though the funds obtained from issuing a note payable are invested in the business, the note
20. The notes should appear as non-current liabilities with full disclosure as to their terms. Each year,
as the profit is determined, notes of an amount equal to two-thirds of the year’s profits should be
21. The purpose of a statement of cash flows is to provide relevant information about the cash receipts
and cash payments of an enterprise during a period. It differs from the statement of financial
22. The difference between these two amounts may be due to increases in current assets (e.g., an
increase in accounts receivable from a sale on account would result in an increase in revenue and
23. The difference between these two amounts could be due to noncash charges that appear in the
income statement. Examples of noncash charges are depreciation, depletion, and amortization of
24. Operating activities involve the cash effects of transactions that enter into the determination of
net income. Investing activities include making and collecting loans and acquiring and disposing
Questions Chapter 5 (Continued)
25. (a) Net income is adjusted downward for the net increase in the accounts receivable (¥39,000 –
¥34,000) by deducting ¥5,000 from ¥90,000 and reporting net cash provided by operating
activities as ¥85,000.
(b) The issuance of the shares (10,000 x ¥115) is a financing activity. The issuance is reported
as follows:
26. The company appears to have good liquidity and reasonable financial flexibility. Its current cash
debt coverage is 1.20
€1,200,000
€1,000,000
, which indicates that it can pay off its current liabilities in a
27. Free cash flow = Net cash provided by operating activities – Capital expenditures – Dividends =
28. Free cash flow is net cash provided by operating activities less capital expenditures and dividends.
The purpose of free cash flow analysis is to determine the amount of discretionary cash flow a
29. A Summary of Significant Accounting Policies is usually the first note to the financial statements. It
Questions Chapter 5 (Continued)
30. Companies use two methods to disclose pertinent information in the statement of financial
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 5.1
Current assets
Inventory …………………………..………………………….
€290,000
Prepaid insurance …………………………………………
9,500
Accounts receivable ………………………………………
Less: Allowance for doubtful accounts ………….
Cash …………………………………………………………….
30,000
BRIEF EXERCISE 5.2
Current assets
Inventory ………………………………………………………
€30,000
Prepaid insurance …………………………………………
5,200
Accounts receivable ………………………………………
Less: Allowance for doubtful accounts ………….
Trading securities …………………………………………
Cash …………………………………………………………….
7,000
BRIEF EXERCISE 5.3
Long-term investments
Held-for-collection securities …………………………..
$ 56,000
Long-term note receivable……………………………….
Land held for investment …………………………………
39,000
BRIEF EXERCISE 5.4
Property, plant, and equipment
Land ……………………………………………………….…..
$ 71,000
Buildings …………………………………………………….
Less: Accumulated depreciation-buildings …….
Equipment …………………………………………………..
Less: Accumulated depreciation-equipment …..
BRIEF EXERCISE 5.5
Intangible assets
Goodwill ………………………………………………………
£150,000
Patents ……………………………………………………….
Franchises …………………………………………………..
BRIEF EXERCISE 5.6
Intangible assets
Capitalized development costs ……………………..
$ 18,000
Goodwill ………………………………………………………
50,000
Franchises …………………………………………………..
47,000
Patents ……………………………………………………….
Trademarks …………………………………………………
10,000
BRIEF EXERCISE 5.7
Current liabilities
Notes payable ………………………………………………
$ 22,500
Accounts payable ………………………………………..
Salaries and wages payable ………………………….
Income taxes payable …………………………..………
Total current liabilities ……………………….
BRIEF EXERCISE 5.8
Current liabilities
Accounts payable ………………………………………..
₤220,000
Advances from customers …………………………..
41,000
Salaries and wages payable ………………………….
27,000
Interest payable ……………………………………………
12,000
Provision for warranties ……………………………….
Income taxes payable …………………………..………
Total current liabilities ……………………….
BRIEF EXERCISE 5.9
Non-current liabilities
Bonds payable ……………………………………………..
₤371,000
Pension liability ……………………………………………
Provision for warranties ……………………………….
Total non-current liabilities …………………
₤752,000
LO: 1,2, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
BRIEF EXERCISE 5.10
Equity
Share capital—ordinary ………………………………..
€ 750,000
Share premium—ordinary …………………………..
200,000
Retained earnings ………………………………………..
income (loss) ……………………………………………
Non-controlling interest ……………………………….
Total equity ……………………………………………
€1,000,000
BRIEF EXERCISE 5.11
Equity
Share capital—preference …………………………..
€152,000
Share capital—ordinary ………………………………..
70,000
Share premium—ordinary …………………………..
174,000
Retained earnings ………………………………………..
Non-controlling interest ……………………………….
Total equity ……………………………………………..
€528,000
BRIEF EXERCISE 5.12
Cash Flow Statement
Cash flows from operating activities
Net income ………………………………………………….
$40,000
Depreciation expense ………………………………….
$ 4,000
Increase in accounts receivable ……………………
Increase in accounts payable ……………………….
7,000
1,000
BRIEF EXERCISE 5.12 (Continued)
Cash flows from investing activities
Purchase of equipment ………………………………..
(8,000)
Cash flows from financing activities
Issue notes payable …………………………………….
Dividends paid …………………………………………….
Net cash provided by financing activities …
LO: 3, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
BRIEF EXERCISE 5.13
Cash flows from operating activities
Net income ………………………………………………….
HK$151,000
Depreciation expense ……………………………………….
HK$44,000
Increase in accounts receivable …………………………
Increase in accounts payable …………………………….
40,500
Adjustments to reconcile net income to net cash
BRIEF EXERCISE 5.14
Cash flows from investing activities
Sale of land and building …………………………………..
R$191,000
Purchase of land ………………………………………………
Purchase of equipment ……………………………………..
BRIEF EXERCISE 5.15
Cash flows from financing activities
Issuance of ordinary shares ………………………………
R$147,000
Purchase of treasury shares ……………………………..
(40,000)
Payment of cash dividend …………………………………
(95,000)
Retirement of bonds …………………………………………
BRIEF EXERCISE 5.16
Free Cash Flow Analysis
Net cash provided by operating activities …………..
R$400,000
Less: Purchase of equipment…………………………..
(53,000)
Purchase of land* …………………………………..
(37,000)
SOLUTIONS TO EXERCISES
EXERCISE 5.1 (15–20 minutes)
(a) If the investment in preference shares is readily marketable and held
(b) Treasury shares should be shown as a reduction of total equity.
(c) Equity.
EXERCISE 5.1 (Continued)
(j) Current asset.
EXERCISE 5.2 (15–20 minutes)
1.
(c)
11.
(c)
2.
(a) (3)
12.
(e)
3.
(e)
13.
(b)
4.
(e)
14.
(c)
5
(a) (2)
15.
(a) (2)
6.
(b)
16.
(a) (1)
7.
(e)
17.
(b)
8.
(a) (3)
18.
(b)
9.
(b)
19.
(d)
10.
(b)
20.
(e)
EXERCISE 5.3 (15–20 minutes)
1.
(e)
10.
(g)
2.
(a)
11.
(e)
3.
(g)
12.
(g)
4.
(e)
13.
(e)
5
(g)
14.
(k)
6.
(h)
15.
(g)
7.
(i)
16.
8.
(c)
17.
(b)
9.
(e)
EXERCISE 5.4 (30–35 minutes)
GULISTAN AG
Statement of Financial Position
December 31
Assets
Non-current assets
Long-term investments
Land held for future plant site ……………….
XXX
Cash restricted for plant expansion ……….
Total long-term investments ……….
€XXX
Long-term investment in
Property, plant, and equipment
Buildings ……………………………………………..
XXX
Less: Accum. depreciation—
buildings ………………………………
XXX
XXX
Intangible assets
Total non-current assets …………….
Current assets
Inventories
Finished goods ……………………………….
€XXX
Work in process ……………………………..
XXX
Raw materials …………………………………
XXX
XXX
Accounts receivable …………………………….
XXX
accounts …………………………..……….
Notes receivable (short-term) ………………..
XXX
Receivables—officers …………………………..
XXX
Cash ……………………………………………………
XXX
Less: Cash restricted for plant
EXERCISE 5.4 (Continued)
Equity and Liabilities
Equity
Share capital—ordinary ………………………………
€ XXX
Share premium—ordinary …………………………..
XXX
Retained earnings
Less: Treasury shares, at cost ……………………
XXX
Total equity ……………………………………..
Non-current liabilities
Bonds payable, due in four years ………………..
Long-term note payable ………………………………
Total non-current liabilities ……………….
Current liabilities
Notes payable, short-term …………………………..
XXX
Salaries and wages payable ………………………..
XXX
Unearned service revenue …………………………..
XXX
Unearned rent revenue ………………………………..
Total current liabilities ………………………
XXX
Total liabilities ………………………………….
Total Equity and liabilities ………………………………..
Note to instructor: An assumption made here is that cash included the
cash restricted for plant expansion. If it did not, then a subtraction from