CHAPTER 1 FINANCIAL STATEMENTS Definition Financial statements are the means by which the information accumulated and processed in financial accounting is periodically communicated to the users. Stated differently, the financial statements are the end product or main output of the financial accounting process. Financial statements are a structured financial representation of the financial position and financial performance of an entity. General purpose financial statements General purpose financial statements are those statements intended to meet the needs of users who are not in a position to require an entity to prepare reports tailored to their particular information needs. i Reports prepared at the request of an entity's management or bankers are not general purpose financial statements because they are prepared specifically to meet the needs of management or bankers. scad Ahemgerak Hh yter ty aid intatree and cette in Muar dues rrollang poss . 1 Scanned with CamScannerWY Components of financial statements A complete set of financial following components: Statements comprises the Statement of financial posit Income statement nt? / Bow Statement of comprehensive it Statement of changes in equity Jr. Statement of cash flows ee lotes, comprising a summary of signifi Policies and other explanatory informatt Shee's Poker ant accounting ion Many entities also present reports and statemen environmental reports and value died sens ‘e particularly in industries in which environmental factore a. significant and when employees are regarded as an importang user group. ie However, such statements and reports are not 7 s are not com; of financial statements and therefore outside of the geome at nat Frontal Regering Stondon ds Objective of financial statements The objective of general purpose financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful wide range of users in making economic decisions, Financial statements also show the results of the stewardship of management of the resources entrusted to it, To meet this objecti about the following: , financial statements provide information Assets Liabilities Equity Income and expenses, including gains and losses Contributions by and distributions to owners in their capacity as owners Cash flows Sap ep I ETE > aml: Such information, along with other information in the notes, would assist users of financial statements in predicting the entity's cash flows and in particular their timing and certainty. However, financial statements do not provide all the information that users may need to make economic decisions since they largely portray the financial effects of past events and do not necessarily provide nonfinancial information. Financial position jilities and The financial position comprises the assets, equity of an entity at a particular moment in time. Specifically, financial position pertains to the liquidity, solvency, » and the need of the entity for additional financing, This information is pictured in the statement of financial position. Financial performance ‘The financial performance comprises the revenue, expenses and net income or loss of an entity for a period of time. Performance is the level of income earned by the entity through the efficient and effective use of its resources. The financial performance of an entity is also known as results of operations and is portrayed in the income statement and statement of comprehensive income. : Cash flows Cash flows are the cash receipts and cash payments arising from the operating, investing and financing activities of the entity, ‘The information about cash receipts and cash payments is presented in the statement of cash flows. Cash flow information is useful in assessing the ability of the entity to generate cash and cash equivalents. Scanned with CamScannerFinancial reporting only pie Financial reporting is the provision of financial informatior about an entity toexternal users that is useful to them in making Gconomie decisions and for assessing the effectiveness of the entity's management. ‘The principal way of providing financial information to external users is through the annual financial statements. However, financial reporting encompasses not only financial ‘statements but also other means of communicating information that relates directly or indirectly to the financial accounting « process, Financial reports include not only financial statements but also other information such as financial highlights, summary of important financial figures, analysis of financial statements and significant ratios. Financial reports also include nonfinancial information such as description of major products and a officers and directors, Objective of financial reporting objective of financial reporting information about the reporting entity t and potential investors, lenders and other creditors i decisions about providing resources to the entity Simply stated, the overall objective of financial reporting is to provide information that is useful for decision making. seca — ‘Target users of financial reporting ing is .d primarily to Goneral purpose financial reporting is directe Gonwrting and potential investors, lenders and other creditors ‘uhich compose the primary user Group. ‘The reason is that existing and potential investors, lenders and other creditors have the most critical and immediate nee¢ for information in financial reports. ‘As-a matter of fact, the primary users of financial information fare the parties that provide resources to the entity. tion that meets the needs of the specified vet the needs of other users such a5 ments and their agencies. Moreover, informat primary users is likely to me employees, customers, govern! ‘The management of a reporting entity is also interested in financial information about the entity. However, management need not rely on general purpose financial reports because itis able to obtain or access additional financial information internally. Specific objectives of financial reporting Specifically, the Conceptual Framework for Financial Reporting states the following objectives of financial reporting: ‘To provide information useful in making investing and a jit decisions about providing resources to the entity. cred b. To provide information useful in assessing the prospects of future net cash flows to the entity. ms and ¢. To provide information about entity resources, changes in resources and claims. Scanned with CamScannerLimitations of financial reporting a. General purpose financial reports do not and cannot provide all of the information that existing and potential investors, lenders and other creditors need. b. General purpose financial reports are not designed to show the value of a reporting entity but these reports provide information to help the primary users estimate the value of the entity. ¢. General purpose financial reports are intended to provide common information to users and cannot accommodate every specific request for information. . Toa large extent, financial reports are based on estimate and judgment rather than exact depiction. Responsibility for financial statements ‘The management of an entity has the primary responsibility for the preparation and presentation of financial statements. ‘The Board of Directors in discharging its responsibilities reviews and authorizes the financial statements for issue before these are submitted to the shareholders of the entity. Management is accountable for the safekeeping of the resources and their proper, efficient and profitable use. Shareholders are interested in information that helps them assess how effectively management has fulfilled this role as this is relevant to the decision concerning their investment and the reappointment or replacement of management. General features of financial statements Fair presentation and compliance with PFRS Going concern Accrual basis Materiality and aggregation Offsetting Frequency of reporting Comparative information Consistency of presentation SAMA spr 6 | ai Fair presentation resent fairly the financial ‘the financial statements shall present fairly fe Te eity position, financial performance and cas Virtually, in all circumstances, fair presentation i achieved if the financial statements are prepared in accordance 7 the Philippine Financial Reporting Standards w represent the GAAP in the Philippines. ‘The application of Philippine Financial Reporting Standards, with additional disclosure when necessary, is presumed to Yesult in financial statements that achieve a fair presentation. “Anentity whose financial statements comply with PFRS shall jnake an explicit and unreserved statement of such compliance in the notes. Fair presentation is defined as faithful representation of the effects of transactions and other events in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses laid down in the Conceptual Framework. Fair presentation requires an entity: a. To select and apply accounting policies in accordance with PFRS. b. To present information, including accounting policies, in a manner that provides relevant and faithfully represented financial information. ¢, To provide additional disclosures necessary for the users to understand the entity's financial statements An entity cannot rectify inappropriate accounting policies either by disclosure of the accounting policies used or by notes or explanatory information. Scanned with CamScannerDeparture from standard In the extremely rare cireumstan ces in wl concludes that compliance with a requiremeey ymmaeement . ‘quirement in a stay would be so misleading, the entity shall depart ear requirement provided the relevant regulasea' ty Framework requires, or otherwise does not preheat Bromewer 8 not prohibit, such « ‘Thus, an entity is permitted to depart from a standard: a. In extremely rare circumstances. b. When management concludes that compliance wi standard would be misleading. pena inten! c. When the departure from the standard is nece e is necessar achieve fair presentation oe d, When the regulatory Conceptual Framework requires or otherwise does not prohibit such a departure. In such circumstances, disclose the following: is incumbent upon the entity to 1. The management has concluded that the financial statements present fairly the financial position, financial performance and cash flows of the entity. 2. That the entity has complied with applicable standards except that it has departed from a particular requirement to achieve a fair presentation. 3. The ttle of the standard from which the entity: has departed, the nature of the departure, including the treatment that the standard would require, the reason why that treatment would be so misleading and the treatment adopted 4. For each period presented, the financial impact of the departure on each item in the financial statements that would have been reported in complying with the requirement me Going concern tity ia viewed as coing concern means that the accounting ent Cte Sing in operation indefinitely in the absence of evidence to the contrary. Going concern is also known as continuity assumption. d normally In other words, financial statements are prepare: ; on the assumption that the entity shall continue in operation for the foreseeable future. ‘Thus, assets are normally recorded at original acquisition cost. As a rule, market values are ignored. However, some standards require measurement of certain assets at fair value. Going concern is particularly relevant when management shall make an estimate of the expected outcome of future events, such as the recoverability of accounts receivable and the useful life of noncurrent assets. ‘This postulate is the very foundation of the cost principle. Financial statements shall be prepared on a going concern basis unless management intends to liquidate the entity or cease trading or has no realistic option but to do so. When upon assessment it becomes evident that there are material uncertainties regarding the ability of the entity to continue as a going concern, those uncertainties shall be fully disclosed. making the assessment about the going concern iption, management shall take into account all available nformation about the future which is at least twelve months from the end of reporting period. he financial statements are not prepared on a going concern basis, such fact shall be disclosed together with the measurement basis and the reason therefor. 9 Scanned with CamScannerAccrual basis An entity shall prepare the financial statements, except for cash flow information, using the accrual basis of accounting Under accrual basis, the effects of transactions and other events are recognized when they occur and not as cash or cash equivalent is received or paid, and they are recorded and reported in the financial statements of the periods to which they relate, In the simplest language, accrual basis means that assets are recognized when they are receivable rather than when physically received, and liabilities are recognized when they are payable rather than when actually paid. Accrual accounting means that income is recognized when ‘earned regardless of when received and expense is recognized when incurred regardless of when paid. The essence of accrual accounting is the recognition of accounts receivable, accounts payable, prepaid expenses, accrued expenses, deferred income, and accrued income. Materiality and aggregation An entity shall present separately each material class of lar items. ‘An entity shalll present separately items of dii or function unless they are immaterial. ilar nature Financial statements result from processing large number of transactions or other events that are aggregated into classes according to their nature or function. ‘The final stage in the process of aggregation and classification is the presentation of condensed and classified data which form line items in the financial statements. For example, cash on hand, petty cash fund, cash in bank and cash equivalent shall be presented as one item “cash and cash equivalents”. Finished goods, goods in process, raw materials and manufacturing supplies are aggregated and presented as one item “inventories”. 10 dScOmmenrrrree seen rest it is aggregated {ts or in the notes. ot individually materi isn eae ite rr in those statement with other items either income of an For example, an investor's share in the net income oe Aeaociate is presented as a separate line item statement. However, if this amount is not individually material, it may. be aggregated with other income. “an entity need not provide a specific that ; Materiaity iid by PPRS if the information is not fe required by When is an item material? ‘There is no strict or uniform rule for determining whether an item is material or not. Very often, this is dependent on good judgment, professional expertise and common sense. However, a general guide may be given, to wit: ‘An item is material if knowledge of it would affect the decision of the informed users of the financial statements. Information is material if the omission or misstatement could influence the economic decision that users make on the basis of the financial statements. For example, small expenditures for tools are often expensed immediately rather than depreciated over their useful life to save on clerical costs of recording depreciation. In such a case, the effect on the financial statements is not large enough to affect economic decisio: Another example is the common practice of large entities of rounding amounts to the nearest thousand pesos in their financial statements, Small entities may round off to the nearest peso 1 Scanned with CamScannerDh Materiality is a relativity Materiality of an item depends on relative size absolute size. What is material for one en ee os immaterial for another. oy be An error of P100,000 in the financial statements of multinational entity may not be important but may bes: critical for a small entity. 0 Factors of materiality In the exercise of judgment in determining material . i ity, following factors may be considered: ae a. Relative size of the item in relation to the total of the group to which the item belongs For example, the amount of advertising in relation to total distribution costs, the amount of office salaries to total administrative expenses, the amount of prepaid expenses to total current assets and the amount of leasehold improvements to total property, plant and equipment b. Nature of the item— An item may be inherently material because by its very nature it affects economic decision. For example, the discovery of a P20,000 bribe is a material event even for a very large entity. Offsetting Assets and liabilities, and income and expenses, when material, shall not be offset against each other. Offsetting may be done when it is required or permitted by another PFRS. 12 Examples of offsetting is are and losses on disposal of noncurrent asee! coord by deducting from the proceeds the carrying amount of the assets and the related selling expenses. imbursed under a Expenditure related to a provigion and reim| (ontractual arrangement with a third party may be netted against the related reimbursement. ae In other words, the expenditure related to a provision an any reimbursement from a third party can be offset, and only the net expenditure is presented as expense. In addition, gains and losses arising from a group of similar transactions are reported on a net basis. For example, foreign exchange gains and losses or gains and losses arising from trading securities are netted against the other. However, if material, such gains and losses are reported separately. ‘The measurement of assets net of valuation allowance is permitted because technically this is not offsetting. ‘Thus, accounts receivable may be shown net of allowance for doubtful accounts. Frequency of reporting An entity shal at least annual -sent a complete set of financial statements When an entity changes the end of the reporting period and presents financial statements for a period longer or shorter than one year, the entity shall disclose: a. The period covered by the financial statements. b. The reason for using a longer or shorter period. c. The fact that amounts presented in the financial statements are not entirely comparable. 13 Scanned with CamScanner> Se Comparable information Except when permitted or required otherwise by PFRS, a entity shall disclose comparative information in respect of previous period for all amounts reported in the curne:s period's financial statements. id Im other words, the financial statements of the current period shall be presented with comparative figures of the financial statements of the immediately preceding year. Comparative information shall be included for narrative and descriptive information when itis relevant to an understanding of the current period's financial statements. For example, details of a legal dispute, the outcome of which ‘was uncertain at the end of the preceding reporting period and is yet to be resolved, are disclosed in the current period Users shall benefit from information that an uncertainty existed at the end of the immediately preceding reporting period, and steps have been taken during the current period to resolve the uncertainty. Third statement of financial position A third statement of financial position is required when an entity: a. Applies an accounting policy retrospectively. b. Makes retrospective restatement of items in the financial statements. c. Reclassifies items in the financial statements. Under these circumstances, an entity shall present three statements of financial position as at: 1. The end of the current period 2. The end of the previous period 3. The beginning of the earliest comparative period 14 Consistency of presentation Implicit in the presentation of comparable information is the principle of consistency. r hat ‘The principle of consistency requires tI methods and practices shall be applied on from period to period’. “the accounting a uniform basis i 1 statement ‘The presentation and classification of financial items shall be uniform from one accounting period to the next. ‘Anentity cannot use the FIFO method of inventory valuation in one year, the average method in the next year, another method in succeeding year and so on. If the FIFO method is adopted in one year, such method is lowed from year to year. Consistency is desirable and essential to achieve comparability of financial statements. However, consistency does not mean that no change in accounting method can be made. If the change will result to information that is faithfully represented and more relevant to the users of financial statements, then such change should be made. But there should be full disclosure of the change and the peso effect of the change. the presentation and classification of items in statements is allowed: a. When it is required by another PFRS. b, When a significant change in the nature of the operations of the entity will demonstrate a more appropriate revised presentation and classification. It is inappropriate for an entity to leave accounts ie e ing policies unchanged when better and acceptable alternatives cest 15 asec seeeeeseeeeestets Scanned with CamScanneres eeeenener aac rae ramets Identification of financial statements Financial statements shall be clearly identified ang distinguished from other information in the same publisheq document. Fach component of the financial statements shall be clear} identified. e In addition, the following information shall be prominent} displayed: : a, The name of the reporting entity. b. Whether the financial statements cover the individual entity or a group of entities ¢. The end of the reporting period or the period covered by the financial statements or notes. 4. The presentation currency. e. The level of rounding used in the amounts in the financial statements, Financial statements are often made more understandable by presenting information in thousands or millions of units of the presentation currency. ‘This is acceptable as long as the level of rounding in presentation is disclosed and relevant and material information is not lost or omitted. 16 QUESTIONS 10 1 12, 1s. 16. Define financial statements. Explain “general purpose” financial statements i 2 What are the components of financial statements? Explain the objective of financial statements. ‘To meet the objective of financial statements, what information is necessary? Explain financial position, financial performance and cash flows of an entity. Explain financial reporting. Explain the target users of financial reporting. What is the objective of financial reporting under the Conceptual Framework for Financial Reporting? What are the specific objectives of financial reporting? What are the limitations of financial reporting? Explain the responsibility for the preparation and presentation of financial statements. What are the "general features" of financial statements? . Explain fair presentation of financial statements. Specifically, what are the requirements of fair presentation? Explain the requirements when there is a departure from an accounting standard. 7 Scanned with CamScanner17. Explain going concern, 18, Explain acerual basis of accounting. 19, Explain materiality and aggregation, 20, When is an item material? 21, What are the factors in determining materiality? 22, Explain the rule on offsetting. 23, Explain the frequency of reporting financial statements, Spouse eaneal eae fet oe shorter than one year? ee 25. Explain the requirement for comparable information. 26. What are the circumstances when three statements of financial position are required? 27. What is consistency of presentation? 28. When is a change in the presentation and classifieati of items in the financial statements allowed? a 29. What is identification of financial statements? 30. What information shall bi e prominently displa: identifying financial statements? as 18 o eemernca sent PROBLEMS problem 1-1 Multiple choice (PAS D 1A cbmplete set of financial statements includes all of the following components, except ‘on, statement of ial positi a. Statement of financial, position, stares comprehensive income and statem b. Statement of changes in equity : b Notes, comprising a summary of significant ‘Accounting policies and other explanatory information 4, Reports and statements such as environmenta reports and value added statements. ‘2, What is the objective of financial statements? formation about the financial position, financial performance and changes in financial position of an entity that is useful to a wide range of tsers in making economic decisions. b. To prepare and present a statement of financial position, statement of comprehensive income, Statement of cash flows and statement of changes in equity, ¢. To prepare and present relevant, reliable, comparable and understandable information to investors and creditors. d. To prepare and present financial statements in accordance with all applicable PFRS and Interpretations a, To provide int 3.To meet the objective of providing information about financial position, financial performance and cash flows of an entity, financial statements should provide information about all of the following, except a. Assets, liabilities and equity b. Income and expenses, including gains and losses ¢. Contributions by and distribution to owners in their capacity as owners. 4d. Nature of business activities 19 Scanned with CamScanner5 Problem 1-2 Multiple choi el 5 1s true concernin, nts & the nts do not pro formation that users may need to mak decisions since they largely portray th effects of past events and do n nonfinancial informat: le all the € economic fe fhancial necessarily provide IL Financial statements show the results of sults of ewardship of management or the accountability ut anagement for the resources entrusted to it. T ont Monly Both I and I Neither I nor II aoe 5. The prima: presentation of 1 reposed in the eparation and entity is Management of the en auditor auditor roller (FRS) 1. An entity decided to exter year to a 15-month period. W required in case of a. The entity shall di period than a period of 1 b. The entity shall change t other similar entities in t which it generally current year. The entity shall disclose used in the financial state comparable ‘The entity shall disclose the pe: lod coveres financial statements. oo ele 1 area in in the ates have done mparative amounts ‘ments are not entirely 20 2, Which of the following 1s not a com ponent of the financial statements? a b c a 43, Which of the following is included in # complet Statement of financial position ‘Statement of changes in equity Report of board of directors Notes to financial statements te set of financial statements? a 4F A statement by the board of directors of compliance ‘with local legislation e ‘R statement of changes in equil a atitetrized statements of financial position for the last five years Value added statement ancial statements include a statement of financial position, a statement of comprehensive income, a st wrement of changes in equity and a statement of cash ae Which of he following is also included within the statements? ‘A statement of retained earnings Accounting tor's report ectors’ report ntity shall clearly identify each financial statement 1 shall display all of the following information minently, exeept Name of the reporting entity or other means of identification, and any change in that information from the previous year. Names of major shareholders of the entity. ‘The presentation currency and level of rounding used in presenting the financial statements, Whether the financial statements cover the individual entity or a group of entities and the date of the end of reporting period or the period covered by the financial 21 Scanned with CamScannerDe Problem 1-8 Multiple choice (PAS 1) 1. Which of the following statements is ine, or concerning fair presentation of financial statementgs °t ‘2 Fair presentation requires the faithful representation of the effects of transactions and other events, b. Financial state n rz ly the financi position, financial performance and cash flows of entity, a ¢. In virtually all cixcumstances, a fair presentati 4. sthsved by compliance with applicable PFRS. An entity whose financial statements comply PERS shall not make an explicit and es parees ‘statement of such compliance in notes, 2. Which of the following cannot be considered presentation of financial statements? “~*~ a. To present information in a relevant and faithf information. To provide additional disclosures whe: ° n compliance with specific PFRS is insufficient to understand the S os Position and financial performance ’o select and apply accounting policies in es ect and apply a Policies in accordance ‘0 rectify inappropriate accountiny ‘ i policies either by disclosure of the accounting policies used or by notes or explanatory information. manner that provides ly represented financial 3. Which of the followin, ae g statements indicates a going a. Management inten: b. Management inte: entity. ¢. Management has no realistic alternative the operations of the entity, ee ee . None of these ds to liquidate the entity. nds to cease the operations of the 22 ent 4-An lard if all of the following conditions are except 1. Techni: ‘particular om a y ig permitted to depart fr aieer In extremely rare circumstances. ® \Wnen management concludes that compliance with the standard would be misleading. . When the departure from the standard is necessary to achieve fair presentation. 4. When the Conceptual Framework for Financial Reporting prohibits such a departure. 5, The effects of transactions and other events on economic resources and claims are depicted in the periods in which those effects occur even if the resulting cash receipts an payments occur in a different period. a. Accrual accounting b. Cash accounting ¢. Modified accrual accounting d. Modified cash accounting 6. Financial statements must be prepared at least a. Annually b. Quarterly cc. Semiannually d. Every two years ly, offsetting in financial statements is aceomplished when a. The allowance for doubtful accounts is deducted from accounts receivable. b. The accumulated depreciation is deducted from property, plant and equipment. c. The total liabilities are deducted from total assets to arrive at net assets. d. Gain or loss from disposal of noncurrent asset is reported by deducting from the proceeds the carrying amount of the asset and the related disposal cost. 23 Scanned with CamScanner5 r ssification of item: 8 The presentation and classi a financial statements shall be retained from one acco period to the next. in the Unting a. Consistency of presentation b. Materiality c. Aggregation a. Comparability 9.A third statement of financial position as at beginning of the earliest comparative period presented is required 1 When an entity applies an accounting policy retrospectively. II When an entity makes a retrospective restatement of items in the financial statements. IIL When an entity reclassifies items in the financial statements, a. Land II only b. Land Ill only c. and Ill only @. I, Wand I 10. An entity shall prepare how many statements of financial position as a result of retrospective application, retrospective restatement and reclassification of items in the financial statements? Two Three Four One Bese 24 eee eee Problem 1-4 Multiple choice (IFRS) L Items of dissimilar nature or function a. Must always be presented separately in financial statements, b. Must not be presented separately in financial statements, c. Must be presented separately in financial statements if those items are material . Must.be presented separately in financial statements even if those items are immaterial. 2. Materiality depends on a. The nature of the omission or misstatement. b. The absolute size and nature of the omission or misstatement, c. The relative size and nature of the omission or misstatement. d. The judgment of management. 3. An entity must disclose comparative information for a. The previous comparable period for all amounts reported. b. The previous comparable period for all amounts reported and for all narrative and descriptive information. ‘The previous comparable period for all amounts reported, and for all narrative and descriptive information when it is relevant to an understanding of the current period's financial statements. 4. ‘The previous two comparable periods for all amounts reported 4. When the classification of items in the financial statements is changed, the entity a, Must not reclassifiy the comparative amounts, b. Can choose whether to reclassify the comparative amounts. Must reclassify the comparative amounts unless it is. impracticable to do so. Must reclassify the current year amounts only. ©, a 25 Scanned with CamScannerees 5. An entity shall present 4, Which of the following best deseribes the term “financial . The statement of cash flows more prominently than performance"? : the other statements. et income or loss for @ b. The statement of financial position more prominently a. The revenue, expenses and net incom than the other statements. period of an entity. ee ¢. The statement of comprehensive income more b. The assets, liabilities and equity of a prominently than the other statements. @) The total assets minus total liabilities, 4. Bach financial statement with equal prominence, §. ‘The total cash inflows minus total cash 0 - Problem 1-5 Multiple choice (IAA) 5, The overall objective of financial reporting is to provide information 1. What is the objective of financial reporting under the Conceptual Framework for Financial Reporting? mat is useful for decision making ‘About assets, liabilities and equity : ‘About financial performance during a period ‘That allows owners to assess performa: management 1a. To provide information about the financial position, performance and cash flows of an entity. b. To prepare and present a statement of financial position and a statement of comprehensive income. ¢. To provide financial information about an entity that is useful to existing and potential investors, lenders and other creditors in making decisions about nce of pore 6. Which is an objective of financial reporting? %} providing resources to the entity. a. To provide information that is useful in making d. To prepare financial statements in accordance with investing and credit decisions. all applicable standards and interpretations. b, To provide information that is useful to management. c. To provide information to those investing in the 2. The primary focus of financial reporting has been on entity. meeting the needs of which of the following? d. To provide information about ways to solve internal and external conflicts about the entity. a. Managers of an entity b. Existing and potential investors, lenders and other 7. What is an objective of financial reporting? creditors ¢. National and local taxing authorities d. Independent CPAs a. To provide information that is useful to management in making decisions. b. To provide information that clearly portrays nonfinancial transactions. To provide information that is useful to assess the amounts, timing and uncertainty of prospective cash 3. Which of the following statements best describes the term “financial position"? . The net income and expenses of an entity a b. The net of financial assets less liabilities of an entity receipts. c. The potential to contribute to the flow of cash and a. To provide information that excludes claims against cash equivalents to the entity the resources. 4. The assets, liabilities and equity of an entity 27 26 Scanned with CamScanner8 An objective of financial reporting is to provide a. Information about the investors in the entity, b. Information about the liquidation value of the resources of the entity. ©. Information that is useful in assessing cash flow prospects. d, Information that will attract new investors, part of the objective of financial reporting, the phrase sessing cash flow prospects" is interpreted to mean a, Cash basis accounting is preferred over accrual basig accounting. b. Information about the financial effects of cash receipts and cash payments is generally considered the best indicator of an entity's present and continuing ability to generate favorable cash flows. ¢. Over the long run, trends in revenue and expenses are generally more meaningful than trends in cash receipts and disbursements d. Allof the choices are correct re flow prospects”. ng “assess ig cash 10. Which of the following statements in r reporting is incorrect? mmancial a. General purpose financial reports do not provide all of the information that primary b, General purpose financial reports a show the value of the reporting entity ¢. General purpose financial reports provide common information to users. d. Financial reports are on estimate and judgment rather tha cannot rs need, signed to re intended to fee MIMIUMreee re ereeeerreeceteeererree gece ezeceee een eee Problem 1-6 Multiple choice (AICPA Adapted) 1. The objective of financial reporting is based on ‘The need for conservatism Reporting on manageinent's stewardship Generally accepted accounting principles ‘The needs of the users of the information pose 2, During a period when an entity is under the direction of a particular management, financial reporting will directly provide information about a. Both entity performance and management performance b. Management performance but not entity performance c. Entity performance but not management performance d. Neither entity performance nor management performance 3,'The information provided by financial reporting pertains to vidual business entities, rather than to industries F an economy as a whole or to members of society as onsumers, to membs sof society as consumers yas consumers d. Individual business entities, industries and an economy as a whole, rather than to members of society as consumers: 29 eee ia ae idual business entities and an economy as a whole vidual business entities and an economy as a e, rather than to industries or to members of Scanned with CamScannerqe 4. Which of the following is not rbjecti Which of a ‘an objective of financia a. Financial reporting shall provide information abou, resources, claims against those resources yesgurca 8 and changes c. Financial reporting shall provide information n investment, credit and similar decision. 4. Financial reporting shall provide information useful in assessing cash flow prospects 5. Which of the following is ne Which of ing is not an objective of financial a ee about assets and claims b Trae information that is useful in assessing c. To: provide, information that is useful in lending and 4 To provide information about the liquidation value o Problem 1-7 Multiple choice (IAA) 1, Which of the following would most likely prepare the most accurate financial forecast for an entity based on empirical evidence? a. Investors using statistical models to generate forecasts b. Corporate management c. Financial analysts a. Independent certified public accountants 30 2. The most useful information to existin g and potential investors, lenders and other creditors in predicting future cash flows is ‘a. Information about current cash flows fr Current earnings based on accrual accounting > Taformation regarding the accounting policies by management ‘4, Information regarding the results obtained by using a wide variety of accounting policies used 43, The acerual basis of accounting is most useful for Determining the amount of income tax liability. Predicting short-term financial performance. Predicting long-term financial performance. ‘Determining the amount of dividends to shareholders. pore .¢ financial statements prepared under GAAP 2 4 a. Do not articulate with one another. : b. Reflect a single measurement basis which is historical cost. c. Are not highly precise because estimate and judgment must be made. 4. Contain a limited number of future projections. 5. In measuring financial performance, accrual accounting, is used because a. Cash flows are considered less important. . It provides a better indication of ability to generate cash flows than cash basis. c. It recognizes revenue when cash is received and expenses when cash is paid. a. It is one of the implicit assumptions. 31 ae a ae as Scanned with CamScanner