Financial Statements 1st | Test Bank with Answers

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Chapter 3

The Financial Statements

Test Bank

True/False Questions

1. Annual reports do not always include financial statements.

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1. Under International Financial Reporting Standards, financial statements may include reports by directors, statements by the chairman of the company, discussion and analysis by management and similar items.

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1. Financial statements must include an opinion from a public accountant about whether a true and fair view of financial results is presented.

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1. Under IFRS, notes to the financial statements should contain the following items in the order listed: 1) a statement of compliance with IFRS, 2) a summary of significant accounting policies, 3) supporting information for items presented on the face of the financial statements, and 4) other disclosures.

Page p119

1. Financial position refers to whether a business reports a profit when revenues exceed expenses, or whether it reports a loss when expenses exceed revenues.

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1. In order to meet the IFRS definition of an asset, a resource must be controlled by the entity as the result of past events.

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1. In order to meet the IFRS definition of an asset, a resource must represent future cash expected to flow to the entity.

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1. To qualify as a current asset under IFRS, an entity must: 1) expect to realize the asset or intends to sell or consume it in its normal operating cycle, 2) hold the asset primarily for the purpose of trading, 3) expect to realize the asset within twelve months after the reporting period or 4) have cash or a cash equivalent.

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1. Under IFRS, if an asset does not meet the criteria to be classified as a current asset, then it is automatically classified as a non-current asset.

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1. An operating cycle is the time it takes to manufacture a product.

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1. Cash equivalents include cash on hand, demand deposits and short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to insignificant amounts of risk.

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1. A company owns an investment that pays 6% interest per year. This investment can be exchanged for cash on demand but if the investment is exchanged before three months, then a fixed fee penalty applies. This investment qualifies as a cash equivalent.

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1. A retail company sells casual clothing such as jeans, t-shirts and similar times. This company orders t-shirts with the company logo for its employees to wear while on duty. The amount spent for these employee t-shirts would be classified as inventories.

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1. A company sells goods to a customer on credit for €12,000. The customer will pay the amount owed within 60 days. This amount owed by the customer would be classified as a trade accounts receivable on the statement of comprehensive income.

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1. A pre-paid expense represents goods and services that are paid for before they are used.

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1. Intangible assets are assets with no physical substance.

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1. A company purchases supplies that will be used over the next three years. These would be classified as a current asset.

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1. A liability is a present obligation arising from past events, the settlement of which is expected to result in an outflow of economic benefits from the entity.

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1. A company borrows ¥120,000,000 which it is obligated to pay back to the lender over two years even though management expects to actually pay the debt within the next six months. This would be classified as a non-current liability.

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1. A trade accounts payable can be a current liability or non-current liability depending on when the company is obligated to pay the amount owed.

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1. A company owes €100,000 which it must repay over the next two years. Half of that amount is due within twelve months and the remainder within twenty-four months. €50,000 would be classified as a current liability and the remainder would be classified as a non-current liability.

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1. Working capital is calculated by subtracting current liabilities from current assets.

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1. Working capital is calculated by subtracting liabilities from assets.

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1. Working capital is calculated by adding current liabilities and current assets.

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1. A company has £1,000 in current assets, £2,500 in total assets, £700 in current liabilities and £2,000 in liabilities. Working capital is £300.

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1. Contributed capital refers to the amount owners have invested in the business plus their interest in retained earnings.

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1. Reserves can be created in one of two ways: 1) Management can appropriate a portion of retained earnings and designate it as a reserve or 2) they can be established through other comprehensive income.

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1. Retained earnings are increased by profit, decreased by losses and increased by dividends.

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1. On 31 December 2010 a company has retained earnings of €14,000. Profit was €6,500 for the year ending 31 December 2011. Dividends of €2,000 were paid during 2011. Management also appropriated €1,000 of retained earnings and designated it as a reserve. The retained earnings balance at 31 December 2011 is €18,500.

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1. On 31 December 2010 a company has contributed capital of £25,000 and retained earnings of £10,000. During 2011 the following changes occur. Shares are sold for £10,000. The company reports a loss for 2011 of £7,700 and pays dividends of £1,200. Management establishes a reserve by appropriating £500 from retained earnings. The equity balance at 31 December 2011 is £51,500.

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1. Consolidated financial statements would include the financial results for the parent and all subsidiaries.

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1. Consolidated financial statements are presented for a group.

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1. If a company has control of one or more other companies it is known as a subsidiary.

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1. A non-controlling interest represents the equity in a company that is not owned by another company.

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1. A non-controlling interest represents the equity in a company that is not owned by the parent.

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1. Performance refers to the financial results of a business entity as reported in the statement of comprehensive income and the statement of financial position.

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1. Performance refers to the relationship of income and expenses as reported in the statement of comprehensive income.

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1. Total comprehensive income has two components: 1) profit or loss and 2) other comprehensive income.

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1. Profit or loss includes other comprehensive income.

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1. The only items that are classified as other comprehensive income are those that are required or permitted by International Financial Reporting Standards.

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1. A company reports that it has income of €150,000 during the year. From this we can conclude that the company had a gross inflow of economic benefits arising in the course of the ordinary activities of the entity.

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1. A gain may be part of profit or loss, or other comprehensive income depending on the nature of the gain.

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1. Cost of sales is an expense.

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1. Cost of goods sold can be an expense or an asset depending on whether an item has been sold or not.

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1. Administrative expenses would not be included as part of cost of sales.

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1. Selling expense are part of cost of sales.

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1. Cost of goods sold refers to a manufacturer’s or merchandiser’s product cost once the product is sold.

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1. Operating profit is calculated by subtracting cost of sales from revenue.

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1. Operating profit is calculated by subtracting operating expenses from gross profit.

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1. Operating profit is the profit from the business’s ordinary operations before other income and expense, finance expense and tax expense are deducted.

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1. A company reports revenue for €3,000 for the period. It also reports €550 in tax expense, €100 in finance expense, €1,200 for cost of goods sold and €500 for operating expense. Operating profit would be €650.

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1. A company reports revenue for €3,000 for the period. It also reports €550 in tax expense, €100 in finance expense, €1,200 for cost of goods sold and €500 for operating expense. Profit would be €650.

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1. A company pays €5,000 in dividends during the reporting period. This reduces equity.

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1. A company incurs expenses of €1,500 during the reporting period. This increases equity.

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1. A company purchases €350 in supplies. This decreases equity.

Page: p149

1. A company buys back shares from one of its shareholders for £43,000. This decreases retained earnings.

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1. A company buys back shares from one of its shareholders for £43,000. This decreases equity.

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1. A company buys back shares from one of its shareholders for ¥55,000,000. During the period ¥12,000,000 in revenue is reported and ¥3,000,000 dividends are paid. The company also reports ¥15,000,000 in expenses. The equity balance at the beginning of the period is ¥120,000,000. The ending equity balance is therefore ¥59,000,000.

Page: p149

1. A company purchases supplies for £500 on credit. From this statement we know that expenditure has been made.

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1. A company purchases supplies for £500 on credit. From this statement we know that an expense has been incurred.

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1. A company purchases supplies for £500 on credit. From this statement we know that a cost has been incurred.

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1. A company purchases and uses supplies for £500 on credit during the reporting period. From this statement we know that an expense has been incurred.

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1. A company purchases and uses supplies for £500 on credit during the reporting period. From this statement we know that a cost has been incurred.

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1. A company purchases and uses supplies for £500 on credit during the reporting period. From this statement we know that expenditure has been made.

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1. An inventories cost on the statement of financial position becomes cost of goods sold on the statement of comprehensive income.

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1. A company pays €35,000 in rent in advance, this would be classified as rent expense.

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Multiple Choice Questions

1. Which of the following would be included in a complete set of financial statements?
   1. A statement of financial position, a statement of comprehensive income, a statement of changes in financial position, and statement of cash flows
   2. Report by the board of directors
   3. Notes to the financial statements
   4. A statement by the chairman
   5. Supplementary schedules with additional financial information
   6. Analysis of financial results by management
2. 1 and 3 only
3. 1, 3 and 4 only
4. 1, 2, 3 and 5 only
5. All would be included in a complete set of financial statements

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1. Which order of the following items in the notes to the financial statements is required by the International Financial Reporting Standards?
   1. Supporting information for items presented on the face of the financial statements
   2. A summary of significant accounting policies
   3. A statement of compliance with IFRS
   4. Other disclosures
2. 2, 3, 4 and then 1
3. 3, 2, 1 and then 4
4. 2, 3, 1 and then 4
5. 3, 2, 4 and then 1

Page: p119

1. Financial position refers to the relationship between which of the following?
2. Income and expenses
3. Profit or loss and other comprehensive income
4. Total comprehensive income, assets, liabilities and equity
5. Assets, liabilities and equity

Page: p120

1. Which criteria are part of the IFRS definition of an asset?
   1. Classified as current or non-current
   2. Future economic benefits are expected to flow to the entity
   3. Controlled by the entity as a result of past events
   4. Can be converted to cash or cash equivalents
2. All are part of the IFRS definition of an asset
3. 1, 2 and 3 only
4. 1, 3 and 4 only
5. 2 and 3 only

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1. Which of the following is not part of the IFRS definition of a current asset?
2. It cannot be classified as non-current
3. Is cash or a cash equivalent
4. The entity expects to realize the asset or intends to sell or consume the asset in its normal operating cycle
5. The entity holds the asset primarily for the purpose of trading

Page: p122

1. A company acquires materials to produce audio components on 1 April 2010. These materials are put into production on 15 April and production is completed on 17 April. On 25 May they are sold on credit and shipped to the customer. On 15 June the customer pays the amount owed for the components. What is the company’s operating cycle?
2. 15 days
3. 17 days
4. 55 days
5. 76 days

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1. A chain of retail stores has the following assets at 31 May 2010: 1) cash in stores €150,000, 2) investments that can be converted to within three days for €75,000, 3) bank deposits of €420,000, 4) investments in the shares of two other companies totaling €60,000. How amount of cash should the company report on its statement of financial position at 31 May 2010?
2. €705,000
3. €225,000
4. €645,000
5. €150,000

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1. A chain of retail stores has the following assets at 31 May 2010: 1) cash in stores €150,000, 2) investments that can be converted to within three days for €75,000, 3) bank deposits of €420,000, 4) investments in the shares of two other companies totaling €60,000. How amount of cash equivalents should the company report on its statement of financial position at 31 May 2010?
2. €75,000
3. €225,000
4. €645,000
5. €540,000

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1. On 31 December 2010, a company reports the following amounts: 1) $12,000 borrowed from a bank with repayment due at the end of September; 2) $150,000 borrowed from a bank with repayment due in three equal installments at the end June in 2011, 2012 and 2013; 3) trade accounts receivable of $27,000; 4) wages expense for $4,500. How much should the company report for current liabilities?
2. $162,000
3. $39,000
4. $43,500
5. $62,000

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1. Which of the following items would not be classified as a non-current asset on 31 December 2010?
   1. Property, plant and equipment which will be used for an estimated 10 years
   2. A trade account receivable to by paid by the customer during the first quarter of 2011
   3. Pre-paid expenses expected to be consumed over the next three months
   4. Inventories of perishable food
2. 1, 2 and 3 only
3. 2, 3 and 4 only
4. 3 and 4 only
5. 2 and 4 only

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1. Which of the following statements is not part of the IFRS definition for a current liability?
2. The entity holds the liability primarily for the purpose of trading
3. The entity expects to settle the liability for cash within the normal operating cycle
4. The entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting date
5. The liability is due to be settled within twelve months after the reporting period

Page: p126

1. An entity that controls one or more other entities is known as a:
2. controlling interest
3. parent
4. subsidiary
5. group

Page: p136

1. An entity that is controlled by another entity is known as a:
2. controlling interest
3. parent
4. subsidiary
5. group

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1. An entity that controls one or more entity and the entities that are controlled are known as a:
2. controlling interest
3. parent
4. subsidiary
5. group

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1. Arti-Pharm Ltd., a pharmaceuticals firm, owns 80% of the shares of Mangan Medical Marketing, Inc. and therefore has control. The shareholders that represent the other 20% of Mangan stock are referred to as:
2. non-controlling interest
3. majority interest
4. subsidiary interest
5. non-voting interest

Page: p137

1. IFRS defines performance as the relationship described in which of the following?
2. Income and expenses
3. Profit or loss and other comprehensive income
4. Total comprehensive income, assets, liabilities and equity
5. Assets, liabilities and equity

Page: p137

1. A company reports the following amounts for 2011: 1) total comprehensive income $89,000; 2) expenses $35,000 and 3) revenue $70,000. What amount of other comprehensive income did the company report?
2. $159,000
3. $35,000
4. $54,000
5. $124,000

Page: p140

1. A company reports the following amounts for 2011: 1) total comprehensive income $89,000; 2) expenses $35,000 and 3) revenue $70,000. What amount of profit or loss did the company report?
   1. $159,000
   2. $35,000
   3. $54,000
   4. $124,000

Page: p140

1. Under IFRS, increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants would be defined by which of the following terms?
   1. Revenue
   2. Gain
   3. Income
   4. Profit

Page: p142

1. A clothing company sells £15,000 of t-shirts during the reporting period. This amount can be described by which of the following terms?
   1. Revenue
   2. Income
   3. Gain
2. 1 only
3. 1 and 2 only
4. 2 and 3 only
5. All three describe this amount

Page: p142

1. A clothing company is in the business of selling t-shirts. However, the company also owns some land that it sold for ¥500,000 more than it paid when it acquired the land. The ¥500,000 can be described by which of the following terms?
   1. Revenue
   2. Income
   3. Gain
2. 1 only
3. 1 and 2 only
4. 2 and 3 only
5. All three describe this amount

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1. A company owns land that it purchased for $4 million. The value has increased to $5 million. The $1 million is correctly classified as other comprehensive income. The $1 million can be described by which of the following terms?
   1. Revenue
   2. Income
   3. Gain
2. 1 only
3. 1 and 2 only
4. 2 and 3 only
5. All three describe this amount

Page: p142

1. Which of the following are expenses of the business?
   1. Operating expenses
   2. Cost of goods sold
   3. Pre-paid expenses
   4. Financing expenses
   5. Tax expenses
      • • 1. All are expenses
          2. 1, 3, 4 and 5 only
          3. 1, 2, 4 and 5 only
          4. 2, 3,4 and 5 only

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1. On 31 December 2011, Vincentio Mining, Ltd. reported the following amounts on its statement of comprehensive income: 1) revenue €45,000; 2) selling expenses €3,300; 3) cost of goods sold €23,000; 4) tax expenses €6,500; 5) administrative expenses €4,000; 6) and financing expenses. Operating expenses were totaled €10,500. What amount did Vincentio report for gross profit for the period?
2. €22,000 profit
3. €14,700 profit
4. €4,200 profit
5. €6,300 loss

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1. On 31 December 2011, Vincentio Mining, Ltd. reported the following amounts on its statement of comprehensive income: 1) revenue €45,000; 2) selling expenses €3,300; 3) cost of goods sold €23,000; 4) tax expenses €6,500; 5) administrative expenses €4,000; 6) and financing expenses. Operating expenses were totaled €10,500. What amount did Vincentio report for profit or loss for the period?
2. €22,000 profit
3. €14,700 profit
4. €4,200 profit
5. €6,300 loss

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1. On 31 December 2011, Vincentio Mining, Ltd. reported the following amounts on its statement of comprehensive income: 1) revenue €45,000; 2) selling expenses €3,300; 3) cost of goods sold €23,000; 4) tax expenses €6,500; 5) administrative expenses €4,000; 6) and financing expenses. Operating expenses were totaled €10,500. What amount did Vincentio report for operating profit for the period?
   • • • 1. €22,000 profit
         2. €14,700 profit
         3. €4,200 profit
         4. €6,300 loss

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1. What is the net effect on equity during a reporting period if revenue increased $5,500: expenses increased $2,000; a dividend of $3,000 were paid; and other comprehensive income increased $1,700?
   • • • 1. Equity decreased by $1,700
         2. Equity increased by $500
         3. Equity increased by $5,700
         4. Equity increased by $2,200

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1. What is the net effect on retained earnings during a reporting period if revenue increased $5,500: expenses increased $2,000; a dividend of $3,000 were paid; and other comprehensive income increased $1,700?
   • • • 1. Equity decreased by $1700
         2. Equity increased by $500
         3. Equity increased by $5,700
         4. Equity increased by $2,200

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1. What is the net effect on total comprehensive income during a reporting period if revenue increased $5,500: expenses increased $2,000; a dividend of $3,000 were paid; and other comprehensive income increased $1,700?
   • • • 1. Equity decreased by $1,700
         2. Equity increased by $500
         3. Equity increased by $5,700
         4. Equity increased by $2,200

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1. Xian Healthy Juices, Ltd. produces bottle fruit drinks. On 15 September 2010, Xian purchased bottles for ¥450,000 in cash. The bottles were all used in production during September. Which of the following terms can be applied to the ¥450,000?
   1. Expenditure
   2. Cost
   3. Expense
   4. Asset
      • • 1. All can be applied
          2. 1, 2 and 3 only
          3. 1, 2 and 4 only
          4. 2, 3 and 4 only

Page: p154

1. Xian Healthy Juices, Ltd. produces bottle fruit drinks. On 15 September 2010, Xian purchased bottles for ¥450,000 in cash. However, none of these bottles were used in production during September. Which of the following terms can be applied to the ¥450,000?
   1. Expenditure
   2. Cost
   3. Expense
   4. Asset
      • • 1. All can be applied
          2. 1, 2 and 3 only
          3. 1, 2 and 4 only
          4. 2, 3 and 4 only

Page: p154

1. Which of the following costs have not expired?
   • • • 1. Rent expense
         2. Wage expense
         3. Depreciation expense
         4. Supplies

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1. Which of the following costs are unexpired?
   • • • 1. Cost of goods sold
         2. Inventories
         3. Depreciation expense
         4. Insurance expense

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Essay Questions

• 1. From an accounting perspective, what is the difference between a corporate annual report and the financial statements?
  2. Describe what information must be contained in the notes and in what order in order to comply with IFRS.
  3. Explain the difference between profit or loss and other comprehensive income.
  4. Define income, gains and revenue based on IFRS. Distinguish between the three concepts.
  5. Define expenditure, cost and expense based on IFRS. Distinguish between these three concepts.