Let’s Check

Now that you have learned the important things to consider in the study of financial
statements and its elements let us try to check your understanding of the concepts being laid
down.

Activity 1. (Adapted) Encircle the letter that you think best describes the statement.

1. What is the objective of financial statements?

a. To provide information about the financial position, financial performance and
changes in financial position of an entity that is useful to a wide range of users in
making economic decisions.
b. To provide a statement of financial position and a statement of comprehensive
income.
c. To present relevant, reliable, comparable and understandable information to
investors.
d. To present financial statements in accordance with all applicable standards.

2. 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
c. Contributions by and distribution to owners in their capacity as owners
d. Nature of business activities

3. Financial statements must be prepared at least

a. Annually
b. Quarterly
c. Semiannually
d. Every two years

4. What financial statement would a potential investor primarily use to assess liquidity and
financial flexibility of an entity?
a. Statement of financial position
b. Income statement
c. Statement of retained earnings
d. Statement of cash flows

5. Which is an essential characteristic of an asset?

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 a. The
claim to an asset’s benefits are legally enforceable

b. An asset is tangible
c. An asset is obtained at a cost
d. An asset provides future benefits

6. The essential characteristics of an asset include all of the following, except

a. The asset is the result of past event
b. The asset provides future economic benefit
c. The cost of the asset can be measured reliably
d. The asset is tangible

7. Conceptually, asset valuation accounts are

a. Assets
b. Neither assets nor liabilities
c. Part of shareholders’ equity
d. Liabilities

8. Working capital is
a. The group of assets needed by the entity to operate profitably
b. Capital which has been reinvested in business
c. Un appropriated retained earnings
d. Current assets less current liabilities

9. As generally used, the term net assets represents

a. Retained earnings
b. current assets less current liabilities
c. total contributed capital
d. total assets less total liabilities

10. When classifying assets as current and noncurrent

a. The amounts at which current assets are carried and reported must reflect
realizable cash value.
b. Prepayments for items such as insurance or rent are included in “other assets”
c. Current assets are determined by the seasonal nature of the business
d. Assets are classified as current if reasonably expected to be realized in cash or
consumed during the normal operating cycle.

11. The basis for classifying assets as current or noncurrent is the period of time normally
required to convert cash invested in
a. Inventory back into cash or 12 months, whichever is shorter

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 b. Recei
vable
s back into cash or 12 months, whichever is longer
c. Property, plant and equipment back into cash or 12 months, whichever is longer.
d. Inventory back into cash or 12 months, whichever is longer.

12. The operating cycle concept

a. Causes the distinction between current and noncurrent items to depend on
whether these would affect cash within one year.
b. Permits some assets to be classified as current even though these are more than
one year removed from becoming cash.
c. Has become obsolete
d. Affects the income statement but not the statement of financial position.

13. Which should be classified as current asset?

a. Trade installment accounts receivable normally collected in 18 months.
b. Cash designated for the redemption of callable preference shares.
c. Cash surrender value of a life insurance policy
d. A deposit on machinery ordered, delivery of which will be made six months

14. Which should not be considered as current asset?

a. Installment notes receivable due over 18 months in accordance with normal trade
practice
b. Prepaid taxes
c. Trading securities
d. Cash surrender value of life insurance policy

15. Current assets should never include

a. A receivable not collectible within one year
b. Current tax asset
c. Goodwill arising in a business combination
d. Premium paid on a bond investment

16. Conceptually, net income is a measure of

a. Wealth
b. Change of wealth
c. Capital maintenance
d. Cash flow

17. Which of the following best describes the concept of accounting income?

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 a. Income
is measured as the amount of “real wealth” that an entity could consume during a
period and be as well-off at the end of that period as it was at the beginning.
b. Market values adjusted for the effect of inflation or deflation are used to calculate
real wealth.
c. Transaction approach is used to record revenue, expenses, gains and losses
throughout the reporting period.

d. Income equals the change in shareholders’ equity during the period.

18. The financial capital concept requires that net assets should be stated at
a. Current cost
b. Historical cost
c. Historical cost adjusted for changes in purchasing power
d. Current cost adjusted for changes in purchasing power

19. The physical capital maintenance concept requires the adoption of which measurement
basis?
a. Historical cost
b. Current cost
c. Realizable value
d. Present value

20. The following statements relate to the two concepts of capital. Which statement is
correct?
I. Under a financial capital concept, such as invested money or invested
purchasing power, capital is synonymous with the net assets or equity of
the entity.
II. Under a physical capital concept, such as operating capability, capital is
regarded as the productive capacity of the entity.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

Activity 2. In column A, identify the account to which element it belongs whether Current Asset
(CA), Noncurrent Assets (NCA), Current Liabilities (CL), Noncurrent liabilities (NCL) or
Shareholders’ equity (SHE). In column B, indicate the line item to which the account belongs.
Column A
1. Share Capital _________ _______________________

2. Accounts Payable _________ _______________________

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 3. Plant
Expansion
Fund _________ _______________________
4. Trading Securities _________ _______________________
5. Employees income tax payable _________ _______________________
6. Goodwill _________ _______________________
7. Raw Materials _________ _______________________
8. Share Premium _________ _______________________
9. Advances from customers _________ _______________________
10. Serial bonds not collectible currently _________ _______________________

11. Investment in Bonds _________ _______________________

12. Notes Payable _________ _______________________
13. Prepaid Insurance _________ _______________________
14. Income Tax Payable _________ _______________________
15. Land _________ _______________________

In a Nutshell
The journey to becoming a CPA really needs an in depth knowledge on the preparation
of financial statements. Now that you have learned the details of it, it is your turn to prepare
financial statements.

Activity 1. Preparation of Statement of Financial Position (Adapted)

The following information was provided for Rose company. The purpose of presenting
these account balances is for you to prepare a statement of financial position as of December
31,
2018. Use the report form in your presentation and provide a supporting schedule or notes to
financial statements. Explain also the importance of presenting this statement of financial
position and the usefulness of these to users of financial statements.
Accounts Receivable 600,000
Unearned rent income 60,000
Advances to officers-not currently collectible 150,000
Retained Earnings (Deficit) (2,700,000)
Sinking Fund 600,000
Share premium-preference 750,000
Building 7,500,000
Premium on bonds payable 1,500,000
Long-term refundable deposit 75,000
Preference share capital 3,000,000
Cash and cash equivalents 750,000
Share premium – ordinary 300,000
Cash surrender value 90,000

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 Notes payable

450,000
Equipment 1,500,000
SSS payable 15,000
Lease Rights 150,000
Accounts payable 600,000
Accrued interest on Notes Receivable 15,000
Accrued salaries 150,000
Inventories 1,950,000
Accumulate depreciation-building 3,000,000
Land 2,250,000
Accumulated depreciation-equipment 300,000
Land Held for speculation 750,000
Allowance for doubtful accounts 30,000

Notes Receivable 375,000

Bonds payable 7,500,000
Computer Software 4,875,000
Dividends payable 180,000
Prepaid Expenses 105,000
Ordinary share capital 7,500,000
Trading Securities 420,000
Withholding tax payable 45,000
Preference share redemption fund 525,000

Activity 2 Preparation of Income Statement (Adapted)

The following information was provided for Macy company. The purpose of presenting
these account balances is for you to prepare an income statement for the year ended December
31, 2018. Use the functional presentation and provide a supporting schedule or notes to
financial
statements. Make also a narrative description highlighting the importance of the information
embodied herein to the users of financial statements.
Sales 3,750,000
Depreciation-store equipment 35,000
Purchases 1,500,000
Office salaries 75,000
Direct Labor 475,000
Depreciation-office equipment 20,000
Indirect Labor 125,000
Depreciation-machinery 30,000
Superintendence 105,000
Sales returns and allowances 25,000
Light, heat and power 160,000
Interest income 5,000

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 Rent-factory building
Gain on sale of equipment
Repair and Maintenance-Machinery
Delivery expenses
Factory Supplies used
Accounting and legal fees
Sales salaries
Office expenses
Advertising
Earthquake loss
Gain from expropriation of asset
Income tax expense
Inventories:
Raw Materials
Goods in process
Finished Goods

Activity 3 Preparation of Statement of Comprehensive Income (Adapted)

The following account balances which appear in the adjusted trial balance of Princess
Company were presented for you to prepare a single statement of comprehensive income for
the year ended December 31, 2018. Provide also a brief description on the importance of
providing this information to users of financial statements.
Gain on sale of equipment 150,000
Translation loss on foreign operation 300,000
Cost of goods sold 9,000,000
Distribution cost 750,000
Sales 14,250,000
Income tax expense 1,425,000
Interest Revenue 375,000
Administrative expenses 450,000
Revaluation surplus during the year 1,800,000
Finance cost 225,000
Share of profit of associate 525,000

Activity 4 Preparation of Statement of Changes in Equity

The following transactions were taken from the records of Marimar Company for you to
prepare a statement of changes in equity for the year ended December 31, 2019. After
preparing the statement of changes in equity, provide a paragraph explaining the importance of
providing this information to the varied users of financial statements.
On January 1, 2019, Marimar company had 3,000,000 authorized ordinary shares of P5
par, of which 1,000,000 shares were issued and outstanding on that date. Account balances
appear for the shareholders’ equity items of Marimar company on January 1, 2019:
Ordinary share capital 5,000,000

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 Share Premium

3,750,000
Retained Earnings 1,625,000

The following transactions transpired during the year:

January 6 Iissued at P54 per share, 50,000 shares of P50 par, 9% cumulative, convertible
preference share capital. Marimar had 125,000 authorized preference shares.
Feb. 3 Reacquired 10,000 ordianry shares for P16 per share. Marimar uses the cost
method.
April 30 Ccompleted an additional public offering of 250,000 ordinary shares with P5 par
value. The shares were sold to the public at P12 per share.
June 20 Declared a cash dividend of P1 per ordinary share, payable on July 10 to
shareholders of record on July 1.
Nov. 6 Sold 10,000 shares of treasury for P21 per share.
Dec. 7 Declared yearly cash dividend on preference share, payable on January 7, 2020,
to shareholders of record on December 31, 2019.

2020
Jan. 17 Before the books for 2019 were closed, Marimar became aware that the ending
inventory on December 31, 2018 was overstated by P100,000. The after tax
effect on 2018 net income was P70,000. The appropriate correcting entry was
recorded. After correction of the beginning inventory, net income for 2019 was
P1,125,000.