CH 05

Test Bank for Intermediate Accounting, Twelfth Canadian Edition
CHAPTER 5
FINANCIAL POSITION AND CASH FLOWS
CHAPTER STUDY OBJECTIVES
1. Understand the statement of financial position and statement of cash flows from a business
perspective. It is important to understand how users of financial statements use the SFP and the cash flow
statement. For example, potential investors in a company may use the SFP to analyze a company’s
liquidity and solvency in order to assess risk of investing. In addition, the SFP provides details about the
company’s financial structure. Users may use a company’s statement of cash flows to assess its earnings
quality and obtain information about its operating, investing, and financing activities.
2. Identify the uses and limitations of a statement of financial position. The SFP provides information
about the nature and amounts of investments in enterprise resources, obligations to creditors, and the
owners’ equity in net resources. The SFP contributes to financial reporting by providing a basis for (1)
calculating rates of return, (2) evaluating the enterprise’s capital structure, and (3) assessing the
enterprise’s liquidity, solvency, and financial flexibility. The limitations of a SFP are as follows: (1) The
SFP often does not reflect current value, because accountants have adopted a historical cost basis in
valuing and reporting many assets and liabilities. (2) Judgements and estimates must be used in preparing
a SFP. (3) The SFP leaves out many items that are of financial value to the business but cannot be
recorded objectively, such as its human resources, customer base, and reputation.
3. Identify the major classifications of a statement of financial position. The SFP’s general elements are
assets, liabilities, and equity. The major classifications within the SFP on the asset side are current assets;
investments; property, plant, and equipment; intangible assets; and other assets. The major classifications
of liabilities are current and long-term liabilities. In a corporation, owners’ equity is generally classified
as shares, contributed surplus, retained earnings, and accumulated other comprehensive income.
4. Prepare a classified statement of financial position. The most common format lists liabilities and
shareholders’ equity directly below assets on the same page.
5. Identify statement of financial position information that requires supplemental disclosure. Five types
of information are normally supplemental to account titles and amounts presented in the SFP. (1)
Contingencies: Material events that have an uncertain outcome. (2) Accounting policies: Explanations of
the valuation methods that are used or the basic assumptions that are made for inventory valuation,
depreciation methods, investments in subsidiaries, and so on. (3) Contractual situations: Explanations of
certain restrictions or covenants that are attached to specific assets or, more likely, to liabilities. (4)
Additional information: Clarification by giving more detail about the composition of SFP items. (5)
Subsequent events: Events that happen after the date of the SFP.
6. Identify major disclosure techniques for the statement of financial position. There are four methods
of disclosing pertinent information in the SFP: (1) Parenthetical explanations: Additional information or
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description is often provided by giving explanations in parentheses that follow the item. (2) Notes: Notes
are used if additional explanations or descriptions cannot be shown conveniently as parenthetical
explanations. (3) Cross-reference and contra items: A direct relationship between an asset and a liability
is cross-referenced on the SFP. (4) Supporting schedules: Often a separate schedule is needed to present
more detailed information about certain assets or liabilities because the SFP provides just a single
summary item.
7. Indicate the purpose and identify the content of the statement of cash flows. The main purpose of a
statement of cash flows is to provide relevant information about an enterprise’s cash receipts and cash
payments during a period. Reporting the sources, uses, and net increase or decrease in cash lets investors,
creditors, and others know what is happening to a company’s most liquid resource. Cash receipts and cash
payments during a period are classified in the statement of cash flows into three different activities: (1)
Operating activities: Involve the cash effects of transactions that enter into the determination of net
income. (2) Investing activities: Include making and collecting loans and acquiring and disposing of
investments (both debt and equity) and property, plant, and equipment. (3) Financing activities: Involve
liability and owners’ equity items and include (a) obtaining capital from owners and providing them with
a return on their investment and (b) borrowing money from creditors and repaying the amounts borrowed.
8. Prepare a statement of cash flows using the indirect and direct methods. This involves determining
cash flows from operations by starting with net income and adjusting it for noncash activities, such as
changes in accounts receivable (and other current asset/liability) balances, depreciation, and gains/losses.
It is important to look carefully at prior years’ operating activities that might affect cash this year, such as
cash collected this year from last year’s credit sales and cash spent this year for last year’s accrued
expenses. The cash flows from investing and financing activities can then be determined by analyzing
changes in SFP accounts and the cash account.
9. Understand the usefulness of the statement of cash flows. Creditors examine the statement of cash
flows carefully because they are concerned about being paid. The amount of net cash flow provided by
operating activities in relation to the company’s liabilities is helpful in making this assessment. In
addition, measures such as a free cash flow analysis provide creditors and shareholders with a better
picture of the company’s financial flexibility.
10. Identify differences in accounting between IFRS and ASPE and identify the significant changes
planned by the IASB for financial statement presentation. Illustration 5-23 outlines the major
differences in how both sets of standards account for and present items on the SFP and statement of cash
flows. Both sets of standards largely require that the same SFP elements be presented. In addition, IFRS
requires presentation of biological assets, investment properties, and provisions. The statement of cash
flow presentation requirements are similar. The IASB issued an Exposure Draft (ED) in May 2015
entitled “Conceptual Framework for Financial Reporting” that included proposed changes to the
definitions of assets and liabilities that is expected to be issued in 2018. The IASB is also working on a
Primary Financial Statements project with a goal of targeted improvements to the structure and content of
primary financial statements such as the statement of financial position and statement of cash flows.
11. Identify the major types of financial ratios and what they measure (Appendix 5A).
Ratios express the mathematical relationship between one quantity and another, in terms of a percentage,
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a rate, or a proportion. Liquidity ratios measure the short-term ability to pay maturing obligations.
Activity ratios measure how effectively assets are being used. Profitability ratios measure an enterprise’s
success or failure. Coverage ratios measure the degree of protection for long-term creditors and investors.
MULTIPLE CHOICE QUESTIONS

Answer No. Description
b 1. Earnings quality
d 2. Limitation of the balance sheet
d 3. Uses of the statement of financial position
b 4. Uses of the statement of financial position
c 5. Uses of the statement of financial position
d 6. Definition of solvency
a 7. Definition of financial flexibility
b 8. Risk of business failure
d 9. Limitations of the statement of financial position
d 10. Monetary assets
c 11. Monetary assets
b 12. Financial instruments
c 13. Non-monetary assets
b 14. Non-monetary assets
c 15. Basis for classifying assets
d 16. Definition of operating cycle
a 17. Identification of current asset
d 18. Identification of non-current asset
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c 19. Classification of securities

c 20. Intangible assets
c 21. Identification of current liabilities
d 22. Definition of working capital
b 23. Identification of working capital items
b 24. Definition of liabilities
a 25. Identification of long-term liabilities
d 26. Classification of equity section accounts
c 27. Classification of shareholders' equity
d 28. Current assets on the balance sheet
b 29. Value of receivables
c 30. Calculate total current assets
b 31. Calculate total current assets
d 32. Calculate total current liabilities
b 33. Calculate retained earnings balance
b 34. Calculate current and long-term liabilities
d 35. Supplemental disclosure
b 36. Supplemental disclosure
c 37. Summary of significant accounting policies
d 38. Methods of disclosure
d 39. Contra account
d 40. Accounting policies
c 41. Definition of statement of cash flows
a 42. Disclosure of revenue-producing activities on the statement of cash flows
b 43. Identify an investing activity
c 44. Identify a financing activity
a 45. Identify an investing activity
c 46. Statement of cash flow
b 47. Classification of investing activity
c 48. Classification of investing activity
a 49. Classification of operating activity
d 50. Classification of financing activity
b 51. Classification of investing activity
a 52. Preparation of statement of cash flows under indirect method
c 53. Cash flows from operating activities
d 54. Preparation of statement of cash flows under indirect method
c 55. Preparation of statement of cash flows under direct method
b 56. Preparation of statement of cash flows under direct method
c 57. Classification of operating activity
b 58. Cash debt coverage ratio
c 59. Current cash debt coverage ratio
d 60. Financial flexibility measure
c 61. Calculation of free cash flow
b 62. Financial flexibility
a 63. Disclosures under ASPE
c 64. Disclosures under IFRS
c 65. Reclassification of current debt
d 66. Special disclosure under IFRS
b 67. Listing of current assets
c 68. Reporting requirements for SFP
c 69. Primary Financial Statements Project
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a 70. New conceptual framework

c 71. Disclosure Initiative—Amendments to IAS 7
b *72. Definition of activity ratios
c *73. Definition of solvency ratios
d *74. Definition of asset turnover
c *75. Calculate asset turnover ratio
d *76. Calculate rate of return on assets
c *77. Financial or capital market risks
*This topic is dealt with in an Appendix to the chapter.
EXERCISES
Item Description
E5-78 Earnings quality

E5-79 Creditworthiness; debt to total assets
E5-80 Liquidity, solvency, and financial flexibility
E5-81 Limitations of the statement of financial position
E5-82 Terminology
E5-83 Definitions
E5-84 IFRS Practice Statement 2
E5-85 Account classification
E5-86 Current liabilities
E5-87 Current assets
E5-88 Account classification
E5-89 Valuation of statement of financial position items
E5-90 Statement of financial position classifications
E5-93 Statement of financial position
E5-94 Statement of financial position presentation
E5-95 Subsequent events
E5-96 Contractual disclosures and ethical consideration
E5-97 Notes
E5-98 Contra or adjunct accounts
E5-99 Statement of cash flows
E5-100 Statement of cash flows purpose
E5-101 Statement of cash flows basic format
E5-102 Cash provided (used) by operating activities
E5-103 Ending cash balance
E5.104 Cash flows from investing activities
E5-105 Cash flows from operating activities – indirect method
E5-106 Cash flows from operating activities – indirect method
E5-107 Cash flows from operating activities – direct method
E5-108 Statement of cash flows ratios
E5-109 Calculation of free cash flow and ratio
*E5-110 Calculation of ratios
*E5-111 Interpretation of ratios
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PROBLEMS
Item Description
P5-114 Statement of financial position format

P5-115 Statement of financial position presentation
P5-116 Calculation of ending retained earnings
P5-117 Statement of cash flows – direct method
P5-118 Statement of cash flows – indirect method
*P5-119 Calculation of ratios
P5-120 Statement of cash flows – indirect method
P5-121 Statement of cash flows – direct method
MULTIPLE CHOICE QUESTIONS
1. When assessing earnings quality, financial analysts are concerned that management may attempt to
manipulate information to make earnings appear better or worse than they really are. Which of the
following would NOT suggest poor earnings quality?
a) reduction of the allowance for doubtful accounts
b) consistent application of GAAP
c) significantly higher net income than cash flows from operations
d) reliance on share issuances to offset repeated negative cash flow from operations
Answer: b
Difficulty: Easy
Learning Objective: Understand the statement of financial position and statement of cash flows from a
business perspective.
Section Reference: Usefulness of the Statements of Financial Position and Cash Flows from a Business
Perspective
CPA: Audit and Assurance
CPA: Financial Reporting
CPA: Strategy & Governance
Bloomcode: Knowledge
AACSB: Analytic
2. Which of the following is a limitation of the balance sheet?

a) Many items that are of financial value are omitted.
b) Judgements and estimates are used.
c) Current fair value is not reported.
d) All of these answer choices are correct.
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Answer: d
Difficulty: Easy
Perspective
Learning Objective: Identify the uses and limitations of a statement of financial position.
Section Reference: Usefulness and Limitations of the Statement of Financial Position
AACSB: Analytic
3. The statement of financial position is useful for all of the following EXCEPT
a) assessing a company's risk.
b) evaluating a company's liquidity.
c) evaluating a company's financial flexibility.
d) determining free cash flows.
Answer: d
Difficulty: Easy
Perspective
AACSB: Analytic
4. The statement of financial position is useful for all of the following EXCEPT to
a) compute rates of return.
b) analyze cash inflows and outflows for the period.
c) evaluate capital structure.
d) assess future cash flows.
Answer: b
Difficulty: Easy
Perspective
AACSB: Analytic
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5. The statement of financial position is useful for analyzing all of the following EXCEPT
a) liquidity.
b) solvency.
c) profitability.
d) financial flexibility.
Answer: c
Difficulty: Easy
AACSB: Analytic
6. An enterprise’s ability to pay its debts and related interest is called

a) liquidity.
b) financial flexibility.
c) the amount of time expected to pass until an asset is realized.
d) solvency.
Answer: d
Difficulty: Easy
AACSB: Analytic
7. An enterprise’s ability to take effective actions to alter the amounts and timing of cash flows so it can
respond to unexpected needs and opportunities is called
a) financial flexibility.
b) liquidity.
c) the quick ratio.
d) solvency.
Answer: a
Difficulty: Easy
AACSB: Analytic
8. Generally, as financial flexibility increases, the risk of enterprise or business failure will
a) increase.
b) decrease.
c) stay the same.
d) be eliminated.
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Answer: b
Difficulty: Easy
AACSB: Analytic
9. Which of the following is NOT a limitation of the statement of financial position?

a) Many assets are reported at historical cost.
b) Judgements and estimates are used.
c) Only “hard” numbers are reported.
d) Disclosure of all pertinent information in the notes.
Answer: d
Difficulty: Easy
AACSB: Analytic
10. Monetary assets represent

a) only cash.
b) contractual rights to receive cash.
c) equity investments in other companies.
d) cash or claims to future cash flows that are fixed and determinable in amounts and timing.
Answer: d
Difficulty: Easy
Learning Objective: Identify the major classifications of a statement of financial position.
Section Reference: Classification in the Statement of Financial Position
AACSB: Analytic
11. Monetary assets include

a) cash, accounts receivable and inventory.
b) accounts and notes receivable and inventory.
c) cash, accounts and notes receivable.
d) accounts receivable and property, plant and equipment.
Answer: c
Difficulty: Easy
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AACSB: Analytic
12. Financial instruments do NOT include

a) cash.
b) inventory.
c) derivatives.
d) accounts payable.
Answer: b
Difficulty: Easy
AACSB: Analytic
13. Non-monetary assets include

a) accounts and notes receivable and inventory.
b) accounts receivable and property, plant and equipment.
c) inventory, property, plant and equipment, and intangibles.
d) accounts receivable and investments.
Answer: c
Difficulty: Easy
AACSB: Analytic
14. Non-monetary assets

a) are those for which the cash value is determinable in amount and timing.
b) are often measured at historical cost.
c) are always classified as non-current.
d) will required future cash outflows from the company.
Answer: b
Difficulty: Easy
AACSB: Analytic
15. The basis for classifying assets as current or non-current is conversion to cash within
a) the accounting cycle or one year, whichever is shorter.
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b) the accounting cycle or one year, whichever is longer.

c) the operating cycle or one year, whichever is longer.
d) the operating cycle or one year, whichever is shorter.
Answer: c
Difficulty: Easy
Learning Objective: Prepare a classified statement of financial position.
Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)
AACSB: Analytic
16. The operating cycle is the time between

a) selling products to customers and the realization of cash.
b) purchase of inventory and selling to customers.
c) manufacture of products and receiving cash from customers.
d) acquisition of assets for processing and the realization in cash or cash equivalents.
Answer: d
Difficulty: Easy
AACSB: Analytic
17. Which of the following is a current asset?

a) trade instalment receivables normally collectible in eighteen months
b) intangible assets
c) investment in associates (significant influence investments)
d) cash designated for the purchase of property, plant and equipment
Answer: a
Difficulty: Easy
AACSB: Analytic
18. Which of the following should NOT be considered current assets in the statement of financial
position?
a) instalment notes receivable due over eighteen months, in accordance with normal trade practice
b) prepaid taxes, which cover assessments for the current year
c) equity or debt securities purchased with cash available for current operations
d) franchises and copyrights
Answer: d
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Difficulty: Easy
AACSB: Analytic
19. Equity or debt securities held to finance future construction of additional plants should be classified
on a statement of financial position as
a) current assets.
b) property, plant, and equipment.
c) non-current investments.
d) intangible assets.
Answer: c
Difficulty: Easy
AACSB: Analytic
20. Which of the following statements about intangible assets is INCORRECT?

a) They are capital assets that have no physical substance.
b) Intangibles with finite lives are amortized but not tested for impairment.
c) Intangibles with indefinite lives are not amortized but are tested for impairment.
d) Internally recognized intangibles are never recognized on the statement of financial position.
Answer: c
Difficulty: Easy
AACSB: Analytic
21. Which of the following is NOT a current liability?

a) unearned revenue
b) derivatives
c) stock dividends distributable
d) trade accounts payable
Answer: c
Difficulty: Easy
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AACSB: Analytic
22. Working capital is

a) capital which has been reinvested in the business.
b) cash invested by owners.
c) cash and receivables less current liabilities.
d) current assets less current liabilities.
Answer: d
Difficulty: Easy
AACSB: Analytic
23. An example of an item which is NOT an element of working capital is

a) accrued interest on notes receivable.
b) goodwill.
c) inventory.
d) short-term investments.
Answer: b
Difficulty: Easy
AACSB: Analytic
24. Which of the following statements best describes a liability?

a) Any obligation, whether enforceable or not, is a liability.
b) A liability is an enforceable economic burden or obligation.
c) A liability is a legal economic benefit.
d) Deferred income taxes are always shown as liabilities.
Answer: b
Difficulty: Easy
AACSB: Analytic
25. Which of the following should be EXCLUDED from long-term liabilities?

a) derivatives
b) employee future benefits obligations
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c) long-term liabilities maturing within the operating cycle, but will be paid from a sinking fund
d) bonds payable maturing in five years
Answer: a
Difficulty: Easy
AACSB: Analytic
26. Which of the following would NOT appear in the equity section of a statement of financial position?
a) preferred shares
b) accumulated other comprehensive income
c) stock dividend distributable
d) investment in affiliate
Answer: d
Difficulty: Easy
AACSB: Analytic
27. The shareholders' equity section is usually divided into which four parts?
a) preferred shares, common shares, retained earnings, contributed surplus
b) preferred shares, common shares, retained earnings, other comprehensive income
c) capital shares, contributed surplus, retained earnings, accumulated other comprehensive income
d) capital shares, appropriated retained earnings, unappropriated retained earnings, contributed surplus
Answer: c
Difficulty: Easy
AACSB: Analytic
28. The current assets section of the balance sheet should include
a) machinery.
b) patents.
c) goodwill.
d) inventory.
Answer: d
Difficulty: Easy
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AACSB: Analytic
29. Receivables are valued based on their ______.

a) fair value
b) estimated amount collectible
c) lower of cost or market value
d) historical cost
Answer: b
Difficulty: Easy
AACSB: Analytic
30. Scooby Corp.'s trial balance included the following account balances at December 31, 2020:
Accounts receivable (net)......................................................................... $82,000
Trading securities..................................................................................... 14,000
Accumulated depreciation on equipment and furniture............................ 30,000
Cash.......................................................................................................... 20,000
Inventory.................................................................................................. 54,000
Equipment................................................................................................ 50,000
Patent........................................................................................................ 8,000
Prepaid expenses...................................................................................... 3,000
Land held for future business site............................................................. 36,000
In Scooby’s December 31, 2020 statement of financial position, the current assets total is
a) $209,000.
b) $181,000.
c) $173,000.
d) $147,000.
Answer: c
Difficulty: Medium
Bloomcode: Application
AACSB: Analytic
Feedback: $82,000 + $14,000 + $20,000 + $54,000 + $3,000 = $173,000
Use the following information for questions 31–33.
Polis Corp.’s trial balance at December 31, 2020 is properly adjusted except for the income tax expense
adjustment.
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Polis Corp.
Trial Balance
December 31, 2020
Dr. Cr.
Cash $ 337,500
Accounts receivable (net) 1,447,500
Inventory 1,192,500
Property, plant, and equipment (net) 4,183,000
Accounts payable and accrued liabilities $990,500
Income taxes payable 342,000
Future income tax liability 37,500
Common shares 1,675,000
Contributed surplus 1,340,000
Retained earnings, Jan 1, 2020 2,325,000
Net sales and other revenues 6,180,000
Costs and expenses 5,040,000
Income tax expenses 689,500
$12,890,000 $12,890,000
Other financial data for the year ended December 31, 2020:
 Included in accounts receivable is $360,000 due from a customer and payable in quarterly
instalments of $45,000. The last payment is due December 29, 2022.
 The balance in the future income tax liability account relates to a temporary difference that arose in a
prior year, of which $15,000 is classified as a current liability.
 During the year, estimated tax payments of $330,000 were charged to income tax expense. The
current and future tax rate on all types of income is 35 percent.
31. In Polis’ December 31, 2020 statement of financial position, the current assets total is
a) $2,977,500.
b) $2,797,500.
c) $1,530,000.
d) $2,247,500.
Answer: b
Difficulty: Medium
AACSB: Analytic
Feedback: $337,500 + [$1,447,500 – ($45,000 x 4)] + $1,192,500 = $2,797,500
32. In Polis’ December 31, 2020 statement of financial position, the current liabilities total is
a) $1,217,500.
b) $1,347,500.
c) $1,100,000.
d) $1,057,000.
Answer: d
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Difficulty: Medium
AACSB: Analytic
Feedback: Note the adjusted income tax expense will be $399,000 [($6,180,000 – $5,040,000) x 35%] =
$399,000. When the expense is reduced by $290,500 ($689,500 – $399,000 = $290,500), the liability will
also be reduced by the same amount to $51,500 ($990,500 + $51,500) + $15,000 = $1,057,000
33. In Polis’ December 31, 2020 statement of financial position, the final retained earnings balance is
a) $2,775,500.
b) $3,066,000.
c) $2,567,500.
d) $3,008,000.
Answer: b
Difficulty: Medium
AACSB: Analytic
Feedback: $2,325,000 + $6,180,000 – $5,040,000 – $399,000 (income tax exp) = $3,066,000
34. On January 1, 2020, Neptune Inc. leased a building to Saturn Corp. for a ten-year term at an annual
rental of $200,000. At inception of the lease, Neptune received $800,000, which covered the first two
years rent of $400,000 and a security deposit of $400,000. This deposit will not be returned to Saturn
upon expiration of the lease, but will be applied to payment of rent for the last two years of the lease.
What portion of the $800,000 should be shown as a current and long-term liability in Neptune’s
December 31, 2020 statement of financial position?
Current Liability Long-term Liability
a) $0 $800,000
b) $200,000 $400,000
c) $400,000 $400,000
d) $400,000 $200,000
Answer: b
Difficulty: Medium
AACSB: Analytic
35. Which of the following balance sheet classifications would normally require the greatest amount of
supplemental disclosure?
a) Current assets
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b) Current liabilities
c) Plant assets
d) Long-term liabilities
Answer: d
Difficulty: Easy
Learning Objective: Identify statement of financial position information that requires supplemental
disclosure.
Section Reference: Information Requiring Supplemental Disclosure
AACSB: Analytic
36. Which of the following is NOT a required supplemental disclosure for the balance sheet?
a) Contingencies
b) Financial forecasts
c) Accounting policies
d) Contractual situations
Answer: b
Difficulty: Easy
disclosure.
AACSB: Analytic
37. Which of the following facts concerning depreciable assets should be included in the summary of
significant accounting policies?
Depreciation Method Composition
a) No Yes
b) Yes Yes
c) Yes No
d) No No
Answer: c
Difficulty: Easy
disclosure.
AACSB: Analytic
38. Which of the following is NOT a method of disclosing additional information in the financial
statements?
a) supporting schedules
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b) parenthetical explanations
c) cross-reference and contra items
d) press releases
Answer: d
Difficulty: Easy
Learning Objective: Identify major disclosure techniques for the statement of financial position.
Section Reference: Techniques of Disclosure
AACSB: Analytic
39. Which of the following is a contra account?

a) Premium on bonds payable
b) Unearned revenue
c) Patents
d) Accumulated depreciation
Answer: d
Difficulty: Easy
AACSB: Analytic
40. Significant accounting policies may NOT be

a) selected on the basis of judgement.
b) selected from existing acceptable alternatives.
c) unusual or innovative in application.
d) omitted from financial-statement disclosure.
Answer: d
Difficulty: Easy
AACSB: Analytic
41. The financial statement which summarizes operating, investing, and financing activities of an entity
for a period of time is the
a) retained earnings statement.
b) income statement.
c) statement of cash flows.
d) statement of financial position.
Answer: c
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Difficulty: Easy
Learning Objective: Indicate the purpose and identify the content of the statement of cash flows.
Section Reference: Purpose, Content, and Format of a Statement of Cash Flows
AACSB: Analytic
42. On a statement of cash flows, the enterprise’s main revenue-producing activities are disclosed in the
a) operating activities.
b) investing activities.
c) financing activities.
d) both operating and investing activities.
Answer: a
Difficulty: Easy
AACSB: Analytic
43. Making and collecting loans and disposing of property, plant, and equipment are
d) liquidity activities.
Answer: b
Difficulty: Easy
AACSB: Analytic
44. In preparing a statement of cash flows, repurchase of a company’s own shares at an amount greater
than cost would be classified as a(n)
a) operating activity.
b) extraordinary activity.
c) financing activity.
d) investing activity.
Answer: c
Difficulty: Easy
5-20
AACSB: Analytic
45. In preparing a statement of cash flows, which of the following transactions would be considered an
investing activity?
a) sale of equipment at book value
b) sale of merchandise on credit
c) declaration of a cash dividend
d) issuance of bonds payable at a discount
Answer: a
Difficulty: Easy
AACSB: Analytic
46. The statement of cash flows reports all of the following EXCEPT
a) the net change in cash for the period.
b) the cash effects of operations during the period.
c) the free cash flows generated during the period.
d) investing transactions.
Answer: c
Difficulty: Easy
AACSB: Analytic
47. In a statement of cash flows, payments to acquire debt instruments of other entities (other than cash
equivalents) should be classified as cash outflows for
d) lending activities.
Answer: b
Difficulty: Easy
AACSB: Analytic
48. In a statement of cash flows, receipts from sales of property, plant, and equipment and other
productive assets should be classified as cash inflows from
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b) financing activities.
c) investing activities.
d) selling activities.
Answer: c
Difficulty: Easy
AACSB: Analytic
49. In a statement of cash flows, interest payments to lenders and other creditors should be classified as
cash outflows for
b) borrowing activities.
c) lending activities.
d) financing activities.
Answer: a
Difficulty: Easy
AACSB: Analytic
50. In a statement of cash flows, proceeds from issuing equity instruments should be classified as cash
inflows from
a) lending activities.
b) operating activities.
c) investing activities.
d) financing activities.
Answer: d
Difficulty: Easy
AACSB: Analytic
51. In a statement of cash flows, payments to acquire debt instruments of other entities (other than cash
equivalents) should be classified as cash outflows for
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d) lending activities.
Answer: b
Difficulty: Easy
AACSB: Analytic
52. A statement of cash flows prepared under the INDIRECT method adds and subtracts certain items to
the base number. Decreases in unearned revenues would be shown as
a) a deduction from net income.
b) an addition to net income.
c) a deduction from sales.
d) an addition to sales.
Answer: a
Difficulty: Easy
Learning Objective: Prepare a statement of cash flows using the indirect and direct methods
Section Reference: Preparation of the Statement of Cash Flows
AACSB: Analytic
53. In preparing a statement of cash flows under the INDIRECT method, cash flows from operating
activities
a) are always equal to accrual accounting income.
b) are calculated as the difference between revenues and expenses.
c) can be calculated by appropriately adding to or deducting from net income those items in the income
statement that do not affect cash.
d) can be calculated by appropriately adding to or deducting from net income those items in the income
statement that do affect cash.
Answer: c
Difficulty: Easy
AACSB: Analytic
54. Preparing a statement of cash flows under the INDIRECT method involves all of the following
EXCEPT determining the
a) cash provided by operations.
b) cash provided by or used in investing and financing activities.
c) change in cash during the period.
d) cash collections from customers during the period.
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Answer: d
Difficulty: Easy
AACSB: Analytic
55. A statement of cash flows prepared under the DIRECT method starts with
a) net income.
b) gross profit.
c) cash received from customers.
d) income from operations.
Answer: c
Difficulty: Easy
AACSB: Analytic
56. Which of the following is NOT included in a statement of cash flows prepared under the DIRECT
method?
a) cash flows from operating activities
b) gross profit
c) cash paid to suppliers and employees
d) interest paid or received
Answer: b
Difficulty: Easy
AACSB: Analytic
57. SingSong Corporation reports the following information:

Net income............................................................................................... $720,000
Depreciation expense............................................................................... 210,000
Increase in accounts receivable................................................................ 90,000
SingSong should report cash provided by operating activities of
a) $420,000.
b) $600,000.
c) $840,000.
d) $1,020,000.
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Answer: c
Difficulty: Easy
AACSB: Analytic
Feedback: $720,000 + $210,000 – $90,000 = $840,000.
58. The cash debt coverage ratio is calculated by dividing net cash provided by operating activities by
a) average long-term liabilities.
b) average total liabilities.
c) ending long-term liabilities.
d) ending total liabilities.
Answer: b
Difficulty: Easy
Learning Objective: Understand the usefulness of the statement of cash flows.
Section Reference: Usefulness of the Statement of Cash Flows
AACSB: Analytic
59. The current cash debt coverage ratio is often used to assess
a) financial flexibility.
b) solvency.
c) liquidity.
d) profitability.
Answer: c
Difficulty: Easy
AACSB: Analytic
60. A measure of a company’s financial flexibility is the

a) cash debt coverage ratio.
b) current cash debt coverage ratio.
c) free cash flow.
d) cash debt coverage ratio and free cash flow.
Answer: d
Difficulty: Easy
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AACSB: Analytic
61. Free cash flow is calculated as net cash provided by operating activities less
a) capital expenditures.
b) dividends.
c) capital expenditures and dividends.
d) capital expenditures and depreciation.
Answer: c
Difficulty: Easy
AACSB: Analytic
62. One of the benefits of the statement of cash flows is that it helps users evaluate financial flexibility.
Which of the following explanations is a description of financial flexibility?
a) the nearness to cash of assets and liabilities
b) the firm's ability to respond and adapt to financial adversity and unexpected needs and opportunities
c) the firm's ability to pay its debts as they mature
d) the firm's ability to invest in a number of projects with different objectives and costs
Answer: b
Difficulty: Easy
CPA: Finance
Bloomcode: Comprehension
AACSB: Analytic
63. A company that follows ASPE

a) must not disclose cash flow per share.
b) may disclose cash flow per share.
c) may disclose cash flow per share if it makes a special election to do so.
d) must disclose cash flow per share.
Answer: a
Difficulty: Easy
Learning Objective: Identify differences in accounting between IFRS and ASPE and identify the
significant changes planned by the IASB for financial statement presentation.
Section Reference: IFRS/ASPE Comparison
AACSB: Analytic
5-26
64. A company that follows IFRS

a) may disclose cash flow per share if it makes a special election to do so.
b) must not disclose cash flow per share.
c) is generally allowed to disclose cash flow per share.
d) only discloses cash flow per share if there are more than two shareholders.
Answer: c
Difficulty: Easy
AACSB: Analytic
65. When current debt is refinanced by the issue date of financial statements, it may generally be
presented as non-current
a) if the company follows IFRS.
b) under either ASPE or IFRS.
c) if the company follows ASPE.
d) only if the company is a subsidiary.
Answer: c
Difficulty: Easy
AACSB: Analytic
66. Which of the following items would require special disclosure under IFRS?
a) investment property only
b) biological assets and investment property only
c) provisions and biological assets
d) biological assets, investment property and provisions
Answer: d
Difficulty: Easy
AACSB: Analytic
67. Some companies following IFRS list current assets in

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a) alphabetical order.
b) the reverse order of liquidity.
c) the ascending order of their balances.
d) the descending order of their balances.
Answer: b
Difficulty: Easy
AACSB: Analytic
68. Which of the following statements about IFRS and ASPE accounting and reporting requirements for
the statement of financial position is NOT correct?
a) The presentation formats required by IFRS and ASPE for the statement of financial position are
similar.
b) One difference between the reporting requirements under IFRS and those of ASPE is that an IFRS
balance sheet may list long-term assets first.
c) Both IFRS and ASPE require that cash flow per share information be reported on the statement of
financial position.
d) Both IFRS and ASPE require that comparative information be reported.
Answer: c
Difficulty: Easy
AACSB: Analytic
69. Significant changes to the presentation of financial statements (Primary Financial Statements Project)
are currently being developed by the IASB. Which of the following best describes the focus of the
changes?
a) to better highlight the company's assets, liabilities and equity
b) to segregate the company’s operating, financing and investing activities
c) to highlight the company's major business and financing activities
d) to increase the number of notes to be attached to financial statements
Answer: c
Difficulty: Easy
Section Reference: Looking Ahead
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AACSB: Analytic
70. The IASB issued a new “Conceptual Framework for Financial Reporting” in March 2018 that
included changes to the definitions of assets and liabilities. For most assets and liabilities, applying the
new definition
a) yields the same accounting results as the previous definitions.
b) results in more conservative reporting of assets, and more aggressive reporting of liabilities.
c) results in more aggressive reporting of assets and more conservative reporting of liabilities.
d) results in more conservative reporting of both assets and liabilities.
Answer: a
Difficulty: Easy
AACSB: Analytic
71. The “Disclosure Initiative—Amendments to IAS7” issued by the IASB in January 2016 proposes
a) the replacement of IAS 7: Statement of Cash Flows.
b) amendments that would provide additional information about investing activities.
c) amendments that would provide additional information about financing activities.
d) amendments that would provide additional information about operating activities.
Answer: c
Difficulty: Easy
AACSB: Analytic
*72. Ratios that measure how effectively an entity is using is assets are called
a) liquidity ratios.
b) activity ratios.
c) solvency ratios.
d) profitability ratios.
Answer: b
Difficulty: Easy
Learning Objective: Identify the major types of financial ratios and what they measure.
Section Reference: Ratio Analysis: A Reference (Appendix 5A)
AACSB: Analytic
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*73. Ratios that measure the degree of protection for long-term creditors and investors or the ability to
meet long-term obligations are called
a) liquidity ratios.
b) activity ratios.
c) solvency ratios.
d) profitability ratios.
Answer: c
Difficulty: Easy
AACSB: Analytic
*74. Net sales divided by average total assets is called

a) inventory turnover.
b) receivables turnover.
c) rate of return on assets.
d) asset turnover.
Answer: d
Difficulty: Easy
AACSB: Analytic
*75. Maggins Inc. gives you the following information pertaining to the year 2020:
Net sales................................................................................................... $880,000
Cost of goods sold.................................................................................... 550,000
Current assets........................................................................................... 525,000
Current liabilities...................................................................................... 262,500
Average total assets.................................................................................. 950,000
Total liabilities......................................................................................... 577,500
Net income............................................................................................... 165,000
The asset turnover ratio of Maggins Inc. is
a) 0.56.
b) 0.17.
c) 0.93.
d) 1.08.
Answer: c
Difficulty: Medium
5-30
AACSB: Analytic
Feedback: $880,000 ÷ $950,000 = 0.93.
*76. Charlie’s Inc. gives you the following information pertaining to the year 2020:
Net sales................................................................................................... $925,000
Current assets........................................................................................... 525,000
Current liabilities...................................................................................... 275,000
Average total assets.................................................................................. 1,000,000
Total liabilities......................................................................................... 560,000
Net income............................................................................................... 225,000
The rate of return on assets Charlie’s Inc. is
a) 92.5%.
b) 42.9%.
c) 4.44%.
d) 22.5%.
Answer: d
Difficulty: Medium
AACSB: Analytic
Feedback: $225,000 ÷ $1,000,000 = 22.5%
*77. Financial or capital market risks are related to

a) financing activities only.
b) investing activities only.
c) both financing and investing activities.
d) operating and financing activities.
Answer: c
Difficulty: Easy
AACSB: Analytic
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EXERCISES
Ex. 5-78 Earnings quality

An analysis of the financial statements of Scion Inc. shows that net income is significantly higher than
cash flows from operations. What does this indicate about the quality of Scion’s earnings? Where else can
analysts look for further information?
Solution 5-78
A net income significantly higher than cash flows from operations could be a sign of poor earnings
quality that may require further analysis. Analysts should look to the financing activities section to see if
Scion is relying on issuance of shares or other financing activities to generate cash flow. They could also
look towards industry reports and analyst expectations to see if Scion’s cash flow and earnings quality are
expected to improve.
Difficulty: Easy
Perspective
CPA: Communication
CPA: Finance
AACSB: Communication
Ex. 5-79 Creditworthiness; debt to total assets

Explain why a high debt to total assets ratio means a company has a higher risk of bankruptcy.
5-32
Solution 5-79
The debt to total assets ratio is a coverage ratio that measures the percentage of total assets provided by
creditors. Coverage ratios are said to measure the degree of protection for long-term creditors and
investors. A company whose assets are heavily financed by creditors (also known as heavily leveraged) is
liable to pay those creditors back first in the event they are forced to liquidate. Where leveraged assets
represent the majority of a company’s value, it is likely that there would be little or nothing left after
repaying these creditors, and that the company would declare bankruptcy before repaying investors or
other equity providers.
Difficulty: Easy
Perspective
CPA: Communication
CPA: Finance
Ex. 5-80 Liquidity, solvency, and financial flexibility

Explain the relation between the concepts of liquidity, solvency and financial flexibility.
Solution 5-80
Liquidity depends on the amount of time expected to pass until an asset is realized (converted into cash)
or until a liability is paid. Solvency reflects an enterprise’s ability to pay its debts and related interest.
Together, liquidity and solvency affect an entity’s financial flexibility, a measure of the enterprise’s
ability to take effective actions to alter the amounts and timing of cash flows so it can respond to
unexpected needs and opportunities. For example, if a company’s cash sources to finance expansion or
pay off maturing debt are limited it will have difficulty surviving bad times, recovering from unexpected
setbacks, and taking advantage of investment opportunities.
Difficulty: Easy
CPA: Communication
Ex. 5-81 Limitations of the statement of financial position

The statement of financial position has many limitations. One of these limitations is that it necessarily
leaves out many items. Of greatest concern to investors are omitted liabilities. Explain why some
liabilities are left off the statement of financial position, and how investors can identify and measure
potentially omitted items.
Solution 5-81
Assets or liabilities may be left off the statement of financial position because they cannot be recorded
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objectively. To preserve the quality of their liquidity and solvency ratios (which measure the enterprise’s
short-term ability to pay maturing obligations) a company may be particularly biased against including
liabilities in the financial statements.
When reviewing a company, an analyst’s knowledge of the business and industry can make it possible to
identify and measure off-balance sheet items that often represent additional risk to the company. For
example, manufacturers or utilities companies may have capital lease obligations which have not been
capitalised. Analysts can search for corresponding note disclosures and industry stats to estimate and
incorporate these lease obligations into the liquidity and solvency ratios.
Difficulty: Easy
CPA: Communication
Ex. 5-82 Terminology

In the space provided at the right, write the word or phrase that is defined or indicated.
1. A company's ability to take effective ______

actions to alter the amounts and timing
of cash flows so it can respond to
unexpected needs and opportunities
2. Claims to future cash flows that are ______

fixed or determinable in amount and timing
3. Short-term, highly liquid investments ______

that are readily convertible into known
amounts of cash
4. Assets that are held for sale in the ______

ordinary course of business
5. Expenditures already made for benefits ______

that will be received within one year
or the operating cycle
6. Assets of physical substance that are ______

used in ongoing business operations
7. Assets that have no physical substance ______
8. The excess of total current assets over ______

total current liabilities
9. Unrealized gains and losses included ______

as part of equity
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Solution 5-82
1. Financial flexibility
2. Monetary assets
3. Cash equivalents
4. Inventories
5. Prepaid expenses
6. Property, plant, and equipment
7. Intangible assets
8. Working capital
9. Accumulated other comprehensive income
Difficulty: Easy
AACSB: Analytic
Ex. 5-83 Definitions

Provide clear, concise answers for the following:
1. Explain the merits of classified financial statements.
2. What are financial instruments?
3. What are inventories?
4. What are other assets?
5. What statement of financial position information requires supplemental disclosure?
6. Explain the purpose of the statement of cash flows.
7. Explain the concept of free cash flow.
Solution 5-83
1. Classification of financial statements increases their information content. This is accomplished
through the grouping of items with similar characteristics and separating items with different
characteristics.
2. Financial instruments are contracts between two or more parties that create financial assets for one
party and a financial liability or equity instrument for the other and include cash, the right to receive
cash or another financial instrument, and investments in other companies.
3. Inventories are assets that are held for sale in the ordinary course of business, in the process of
5-35
production for such sale, or in the form of materials or supplies to be consumed in the production
process or in the rendering of service.
4. “Other assets” includes assets that are not included anywhere else. They commonly include items
such as non-current receivables and assets in special funds and require the disclosure of sufficient
detail.
5. Supplemental disclosure is required for contingencies, accounting policies, contractual situations,

and subsequent events. Additional information is also required for many individual statement of
financial position items.
6. The purpose of the statement of cash flows is to allow users to assess an entity's capacity to generate
cash and cash equivalents and its needs for cash resources. The statement identifies the sources of
cash inflows and uses of cash during the period.
7. Free cash flow can be defined as a measure of a company's level of financial flexibility and is
calculated as cash flow from operating activities less capital expenditures and dividends.
Difficulty: Easy
disclosure.
CPA: Communication
Ex. 5-84 IFRS Practice Statement 2

IFRS Practice Statement 2 (PS2) was issued in September 2017 and provides (non-mandatory) guidance
for reporting entities to consider. Given that information is material if its omission or misstatement could
influence financial information users’ decisions, identify the four-step process for assessing materiality
suggested by PS2.
Solution 5-84
PS2 suggests a four-step process for assessing materiality when preparing financial statements, including:
(a) Identifying information that is potentially material;
(b) Assessing whether the identified information is material;
(c) Organizing the information to communicate it clearly and concisely to key users;
(d) Reviewing the draft financial statements to determine if all material information has been properly
identified and materiality considered based on the complete set of financial statements.
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Difficulty: Easy
CPA: Communication
Ex. 5-85 Account classification

Although the statement of financial position can be classified and presented in several ways, the major
subdivisions noted in Illustration 5.1 tend to be closely followed. Explain how following these
classifications contributes to the financial statement objectives of representational faithfulness and
transparency.
Solution 5-85
Standard classifications make it easier to calculate important ratios, such as the current ratio for assessing
liquidity and debt to equity ratios for assessing solvency. Breaking down assets and liabilities into
categories helps users calculate which assets are more significant than other and how these relationships
change over time. This gives insight into management’s strategy and stewardship. If classifications were
uncommon across companies and years this type of intra- and inter-company analysis would not be
possible, and some adjustment would be necessary to bring statements to a comparable and transparent
format. Keeping the same format enhances transparency. Where there is a change in presentation to
preserve representational faithfulness, the company should disclose any supplementary information,
including, but not limited to, comparative data for prior years, to facilitate analysis and enhance the
understanding of financial statement users.
Difficulty: Easy
CPA: Communication
Ex. 5-86 Current liabilities

Define current liabilities without using the word "liability."
Solution 5-86
Current liabilities are legally enforceable obligations that are due within one year from the date of the
statement of financial position or the operating cycle, whichever is longer.
Difficulty: Easy
CPA: Communication
5-37
Ex. 5-87 Current assets

Define current assets without using the word “asset.”
Solution 5-87
Current assets are resources (future economic benefits) expected to be converted to cash, sold, or
consumed in one year or the operating cycle, whichever is longer.
Difficulty: Easy
CPA: Communication
Ex. 5-88 Account classification

ASSETS LIABILITIES AND CAPITAL
a) Current assets f) Current liabilities
b) Investments g) Long-term liabilities
c) Property, plant and equipment h) Preferred shares
d) Intangibles i) Common shares
e) Other assets j) Contributed surplus
k) Retained earnings
l) Items excluded from statement of financial
position
Using the letters above, classify the following accounts according to the preferred statement of financial
position presentation.
_____ 1. Bond sinking fund
_____ 2. Common stock dividend distributable
_____ 3. Appropriation for plant expansion
_____ 4. Bank overdraft
_____ 5. Bonds payable (due 2024)
_____ 6. Premium on common shares
_____ 7. Securities owned by another company which are collateral for that company's note
_____ 8. Trading securities
_____ 9. Inventory
_____10. Unamortized discount on bonds payable (due 2024)
_____11. Patents
_____12. Unearned revenue
Solution 5-88
1. b
2. k
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3. k
4. f
5. g
6. j
7. l
8. b
9. a
10. g
11. d
12. f
Difficulty: Easy
AACSB: Analytic
Ex. 5-89 Valuation of statement of financial position items

Use the code letters listed below (a – k) to indicate, for each statement of financial position item (1 – 13)
listed below, the usual valuation reported on the statement of financial position.
a) No par value
b) Current cost of replacement
c) Amount payable when due, less unamortized discount or plus unamortized premium
d) Amount payable when due
e) Fair value at statement of financial position date
f) Net realizable value
g) Lower of cost and net realizable value
h) Original cost less accumulated depreciation/amortization
i) Original cost less accumulated depletion
j) Historical cost
k) Unexpired or unconsumed cost
______ 1. Common shares _______ 8. Long-term bonds payable

______ 2. Prepaid expenses _______ 9. Land (in use)
______ 3. Natural resources _______10. Land (future plant site)
______ 4. Property, plant, and equipment _______11. Patents
______ 5. Trade accounts receivable _______12. Trading securities
______ 6. Copyrights _______13. Trade accounts payable
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______ 7. Merchandise inventory
Solution 5-89
1. a
2. k
3. i
4. h
5. f
6. h
7. g
8. c
9. j
10. j
11. h
12. e
13. d
Difficulty: Easy
AACSB: Analytic
Ex. 5-90 Statement of financial position classifications

Typical statement of financial position (SFP) classifications are as follows:
a) Current Assets g) Long-Term Liabilities
b) Investments h) Share Capital
c) Plant Assets i) Contributed Surplus
d) Intangible Assets j) Retained Earnings
e) Other Assets k) Notes to Financial Statements
f) Current Liabilities l) Not Reported on SFP
Indicate by use of the above letters how each of the following items would be classified on a statement of
financial position prepared at December 31, 2020. If a contra account, or any amount that is negative or
opposite the normal balance, place parentheses around the letter selected. A letter may be used more than
once or not at all.
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_____ 1. Accrued salaries and wages

_____ 2. Rental revenues for three months collected in advance
_____ 3. Land used as plant site
_____ 4. Equity securities classified as short term
_____ 5. Cash
_____ 6. Accrued interest payable due in thirty days
_____ 7. Premium on preferred shares issued
_____ 8. Dividends in arrears on preferred shares
_____ 9. Petty cash fund
_____ 10. Unamortized discount on bonds payable due in 2026
_____ 11. Common shares at no par value
_____ 12. Bond indenture covenants
_____ 13. Unamortized premium on bonds payable due in 2026
_____ 14. Allowance for doubtful accounts
_____ 15. Accumulated depletion, oil well
_____ 16. Natural resources—timberlands
_____ 17. Deficit (no income earned since beginning of company)
_____ 18. Goodwill
_____ 19. Ninety-day notes payable
_____ 20. Investment in bonds in another company; that will be held to 2024 maturity
_____ 21. Land held for speculation
_____ 22. Death of company president
_____ 23. Current maturity of bonds payable
_____ 24. Investment in subsidiary; no plans to sell in the near future
_____ 25. Trade accounts payable
_____ 26. Preferred shares, no par value
_____ 27. Prepaid expenses for next twelve months
_____ 28. Copyright
_____ 29. Accumulated depreciation, equipment
_____ 30. Earnings, not distributed to shareholders
Solution 5-90
1. f 16. c
2. f 17. j
3. c 18. e
4. a 19. f
5. a 20. b
6. f 21. b
7. i 22. l
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8. k 23. f
9. a 24. b
10. g 25. f
11. h 26. h
12. k 27. a
13. g 28. d
14. a 29. c
15. c 30. j
Difficulty: Easy
AACSB: Analytic

The various classifications listed below have been used in the past by Mercury Ltd. in its statement of
financial position. The corporation asks your professional opinion concerning the appropriate
classification of each of the items 1–14 below.
a) Current Assets f) Current Liabilities
b) Investments g) Long-Term Liabilities
c) Property, Plant and Equipment h) Share Capital
d) Intangible Assets i) Retained Earnings
e) Other Assets
Indicate by letter how each of the following items should be classified. If an item need not be reported on
the statement of financial position, use the letter "X." A letter may be used more than once or not at all. If
an item can be classified in more than one category, choose the category most favoured by the authors of
your textbook.
_____ 1. Employees' payroll deductions

_____ 2. Cash in sinking fund
_____ 3. Rent revenue collected in advance
_____ 4. Factory building retired from use and held for sale
_____ 5. Patents
_____ 6. Payroll cash fund
_____ 7. Goods held on consignment
_____ 8. Accrued revenue on short-term investments
_____ 9. Advances to salespersons
_____10. Premium on bonds payable due two years from date
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_____11. Bank overdraft

_____12. Salaries which company budget shows will be paid to employees within the next year
_____13. Work in process
_____14. Appropriation of retained earnings for bond indebtedness
Solution 5-91
1. f
2. b
3. f
4. a or e
5. d
6. a
7. x
8. a
9. a
10. g
11. f
12. x
13. a
14. i
Difficulty: Easy
AACSB: Analytic

The various classifications listed below have been used in the past by Droid Inc. in its statement of
financial position.
a) Current Assets e) Current Liabilities
b) Investments f) Long-term Liabilities
c) Plant and Equipment g) Common Shares
d) Intangible Assets h) Retained Earnings
Instructions
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Indicate by letter how each of the items below should be classified at December 31, 2020. If an item is
not reported on the December 31, 2020 statement of financial position, use the letter "X" for your answer.
If the item is a contra account within the particular classification, place parentheses around the letter. A
letter may be used more than once or not at all.
Sample question and answer:

a__ Allowance for doubtful accounts
_____ 1. Customers' accounts with credit balances
_____ 2. Bond sinking fund
_____ 3. Salaries which the company's cash budget shows will be paid to employees in 2021
_____ 4. Accumulated depreciation
_____ 5. Appropriation of retained earnings for plant expansion
_____ 6. Impairment of goodwill for 2020
_____ 7. On December 31, 2020, Droid signed a purchase commitment to buy all of its raw materials
from Jupiter Inc. for the next two years
_____ 8. Discount on bonds payable due March 31, 2023
_____ 9. Launching of Droid’s internet retailing division in February, 2020
_____10. Cash dividends declared on December 15, 2020, payable on January 15, 2021
Solution 5-92
1. e
2. b
3. x
4. c
5. h
6. x
7. x
8. f
9. x
10. e
Difficulty: Easy
5-44

AACSB: Analytic
Ex. 5-93 Statement of financial position

The following statement of financial position was prepared by the bookkeeper for Hauser Company as of
December 31, 2020:
Hauser Company
Statement of Financial Position
as of December 31, 2020
Cash $ 95,000 Accounts payable $ 85,000

Accounts receivable (net) 52,200 Bonds payable 100,000
Inventory 62,000 Shareholders' equity 238,500
Investments 76,300
Equipment (net) 106,000
Patents 32,000
$423,500 $423,500
The following additional information is provided:

1. Cash includes the cash surrender value of a life insurance policy $9,400, and a bank overdraft of
$2,500 has been deducted.
2. The net accounts receivable balance includes:
(a) accounts receivable—debit balances $60,000;
(b) accounts receivable—credit balances $4,000;
(c) allowance for doubtful accounts $3,800.
3. Inventory does not include goods costing $3,000 shipped out on consignment. Receivables of $3,000
were recorded on these goods.
4. Investments include investments in common shares, trading $19,000 and available-for-sale $48,300,
and franchises $9,000.
5. Equipment costing $5,000 with accumulated depreciation $4,000 is no longer used and is held for
sale. Accumulated depreciation on the other equipment is $40,000.
Instructions
Prepare a statement of financial position in good form (shareholders' equity details can be omitted.)
Assume Hauser reports in accordance with ASPE.
Solution 5-93
Hauser Company
As of December 31, 2020
Assets
Current assets
Cash $ 88,100 (1)
Trading securities 19,000
Accounts receivable $ 57,000 (2)
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Less: Allowance for doubtful accounts 3,800 53,200

Inventories 65,000 (3)
*Equipment held for sale 1,000 (4)
Total current assets 226,300
Investments
Available-for-sale securities 48,300
Cash surrender value 9,400 57,700
Property, plant, and equipment

Equipment 145,000 (5)
Less: accumulated depreciation 40,000 105,000
Intangible assets
Patents 32,000
Franchises 9,000 41,000
Total assets $430,000
Liabilities and Shareholders' Equity

Current liabilities
Accounts payable $ 85,000
Bank overdraft 2,500
Unearned revenue 4,000 (6)
Total current liabilities 91,500
Long-term liabilities
Bonds payable 100,000
Total liabilities 191,500
Shareholders' equity 238,500

Total liabilities and shareholders' equity $430,000
(1) ($95,000 – $9,400 + $2,500)

(2) ($60,000 – $3,000)
(3) ($62,000 + $3,000)
(4) ($5,000 – $4,000)
(5) ($106,000 + $40,000 – $5,000 + $4,000)
(6) Credit balances in accounts receivable
*An alternative is to show it as another asset.
Difficulty: Medium
AACSB: Analytic
Ex. 5-94 Statement of financial position presentation

Given the following account information for the first year of Howard Corporation, prepare a balance
5-46
sheet in report form for the company as of December 31, 2020. All accounts have normal balances.
Equipment................................................................................................ 60,000
Interest Expense....................................................................................... 2,400
Interest Payable........................................................................................ 600
Retained Earnings.................................................................................... ?
Dividends................................................................................................. 50,400
Land......................................................................................................... 137,320
Accounts Receivable................................................................................ 102,000
Bonds Payable.......................................................................................... 78,000
Notes Payable (due in 6 months).............................................................. 29,400
Common Shares....................................................................................... 70,000
Accumulated Depreciation—Equip.......................................................... 10,000
Prepaid Advertising.................................................................................. 5,000
Service Revenue....................................................................................... 341,400
Buildings.................................................................................................. 80,400
Supplies.................................................................................................... 1,860
Income Taxes Payable.............................................................................. 3,000
Utilities Expense...................................................................................... 1,320
Advertising Expense................................................................................. 1,560
Salaries and Wages Expense.................................................................... 53,040
Salaries and Wages Payable..................................................................... 900
Accumulated Depr.—Bld......................................................................... 15,000
Cash.......................................................................................................... 45,000
Depreciation Expense............................................................................... 8,000
Solution 5-94
Howard Corporation
Balance Sheet
December 31, 2020
Assets
Cash $ 45,000
Accounts Receivable 102,000
Supplies 1,860
Prepaid advertising 5,000
Total current assets $ 153,860
Land 137,320
Building $ 80,400
Accumulated depreciation - bld (15,000) 65,400
Equipment 60,000
Accumulated depreciation—eq (10,000) 50,000 252,720
Total assets $ 406,580
Liabilities & Shareholders' Equity

Notes payable $ 29,400
Income taxes payable 3,000
Salaries and wages payable 900
Interest payable 600
Total current liabilities $ 33,900
Long-term liabilities
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Bonds payable 78,000

Total liabilities 111,900
Common shares 70,000
Retained earnings ($275,080*- $50,400) 224,680
Total shareholders' equity 294,680
Total liabilities & shareholders' equity $ 406,580
*$341,400 – $53,040 – $8,000 – $2,400 – $1,560 – $1,320
Difficulty: Medium
AACSB: Analytic
Ex. 5-95 Subsequent events

Explain the importance of considering subsequent events before financial statements are issued. What two
types of subsequent events should be considered prior to financial statement issuance?
Solution 5-95
There are generally several weeks or months after the year end before the financial statements are issued.
This time is to count inventory, reconcile subsidiary ledgers with controlling accounts, prepare necessary
adjusting entries, ensure all transactions have been entered and obtain an audit. It’s possible that, in this
period, important transactions and events may occur that materially affect the company’s financial
position. These events are known as subsequent events, and fall into two types:
1. Events that provide further evidence of conditions that existed at the date of the Statement of
Financial Position
2. Events that indicate conditions that occurred after the financial statement date.
Difficulty: Easy
CPA: Communication
Ex. 5-96 Contractual disclosures and ethical consideration

Contractual obligations should be disclosed in the notes to financial statements when they are significant.
Considerable judgement is needed to determine whether leaving out such information is misleading. What
principle should the accountant’s judgment consider in this situation? Describe anything that should be
factored into the disclosure decision.
Solution 5-96
The basis for including additional information is the full disclosure principle; that is, the information
needs to be important enough to influence the decisions of an informed user. When in doubt, it is better to
disclose a little too much information than not enough. However, the accountant’s judgement should also
include ethical considerations, because the way of disclosing accounting principles, methods, and other
items that have important effects on the enterprise may reflect the interests of a particular stakeholder in
5-48
subtle ways that are at the expense of other stakeholders. For example, a reader might benefit from
comprehensive note disclosures that potentially jeopardize the company’s competitive advantage or its
stance with regard to a legal matter.
Difficulty: Easy
disclosure.
CPA: Communication
CPA: Professional and Ethical behaviour
AACSB: Ethics
Ex. 5-97 Notes

Describe the purpose and appropriate use of notes to the financial statements. How should notes be
presented, and what information should they provide? Name an area of the financial statements for which
notes are frequently used.
Solution 5-97
Notes are used if additional explanations cannot be shown conveniently as parenthetical explanations or
to reduce the amount of detail on the face of the statement. The notes should present all essential facts as
completely and concisely as possible. Loose wording can mislead readers instead of helping them. Notes
should add to the total information made available in the financial statements, while not raising
unanswered questions or contradicting other parts of the statements.
An area of the financial statements often accompanied by notes is the property, plant, and equipment
portion.
Difficulty: Easy
CPA: Communication
Ex. 5-98 Contra or adjunct accounts

The use of contra or adjunct accounts is common in financial statement preparation. Though the function
of these accounts is similar, they are slightly different in nature. Describe each, and name one scenario in
which it would be used.
Solution 5-98
Contra Account—Is an SFP item that reduces an asset, liability, or owners’ equity account. Examples
include Accumulated Depreciation and Allowance for Doubtful Accounts.
Adjunct Account—Is an SFP item that increases an asset, liability, or owners’ equity account. An example
is Premium on Bonds Payable.
Difficulty: Easy
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CPA: Communication
Ex. 5-99 Statement of cash flows

For each event listed below, select the appropriate category, which describes its effect on a statement of
cash flows:
a) Cash provided/used by operating activities
b) Cash provided/used by investing activities
c) Cash provided/used by financing activities
d) Not a cash flow
_____ 1. Payment on long-term debt
_____ 2. Issuance of bonds at a premium
_____ 3. Collection of accounts receivable
_____ 4. Cash dividends declared
_____ 5. Issuance of shares to acquire land
_____ 6. Sale of marketable securities (long-term)
_____ 7. Payment of employees' wages
_____ 8. Issuance of common shares for cash
_____ 9. Payment of income taxes payable
_____10. Purchase of equipment
_____11. Purchase of treasury stock (common)
_____12. Sale of real estate held as a long-term investment
Solution 5-99
1. c
2. c
3. a
4. d
5. d
6. b
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7. a
8. c
9. a
10. b
11. c
12. b
Difficulty: Easy
AACSB: Analytic
Ex. 5-100 Statement of cash flows purpose

What simple but important questions does the statement of cash flows help answer?
Solution 5-100
The statement of cash flows helps answer the following simple but important questions:
1. Where did cash come from during the period?
2. What was cash used for during the period?
3. What was the change in the cash balance during the period?
Difficulty: Easy
CPA: Communication
Ex. 5-101 Statement of cash flows basic format

Illustrate the basic format of the statement of cash flows.
Solution 5-101
Statement of Cash Flows
Cash flows from operating activities......................................................... $xxx
Cash flows from investing activities.......................................................... xxx
Cash flows from financing activities......................................................... xxx
Net increase (decrease) in cash.................................................................. xxx
Cash at beginning of year.......................................................................... xxx
Cash at end of year.................................................................................... $xxx
Difficulty: Easy
5-51

AACSB: Analytic
Ex. 5-102 Cash provided (used) by operating activities

Willows Corporation reports the following information:
Net income............................................................................................... $320,000
Depreciation expense............................................................................... 70,000
Increase in accounts receivable................................................................ 30,000
What amount should Willows report under the cash provided (used) by operating activities portion of
their statement of cash flows?
Solution 5-102
Willows should report cash provided by operating activities of $360,000.
Calculation:
$320,000 + $70,000 – $30,000 = $360,000
Difficulty: Medium
AACSB: Analytic
Ex. 5-103 Ending cash balance

Caldwell Corporation reports:
Cash provided by operating activities....................................................... $280,000
Cash used by investing activities.............................................................. 110,000
Cash provided by financing activities....................................................... 140,000
Beginning cash balance............................................................................ 70,000
What is Caldwell’s ending cash balance?
Solution 5-103
Caldwell’s ending cash balance is $380,000.
Calculation:
$70,000 + $280,000 – $110,000 + $140,000 = $380,000
Difficulty: Medium
AACSB: Analytic
Ex. 5-104 Cash flows from investing activities

Markle Corporation reports:
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Cash provided by operating activities....................................................... $70,000

Cash provided by financing activities....................................................... 35,000
Beginning cash balance............................................................................ 17,500
Ending cash balance................................................................................. 95,000
What is Markle`s cash provided/(used) by investing activities?
Solution 5-104
Markle`s cash used by investing activities is $27,500.
Calculation:
$95,000 - $17,500 – $70,000 - $35,000 = $(27,500)
Difficulty: Medium
AACSB: Analytic
Ex. 5-105 Cash flows from operating activities – indirect method
Carla Limited had the following financial statements:
Carla Limited
Income Statement
For the Year Ended December 31, 2020
Net sales........................................................................................................... $165,000

Cost of goods sold ........................................................................................... 97,500
Gross profit ..................................................................................................... 67,500
Operating expenses.......................................................................................... 27,500
Income from operations................................................................................... 40,000
Interest expense................................................................................................ 3,500
Income before income taxes............................................................................. 36,500
Income taxes.................................................................................................... 11,000
Net income....................................................................................................... $ 25,500
Carla Limited.
Comparative Statement of Financial Position
As at December 31
2020 2019
Cash $15,000 $9,750
Accounts receivable 11,750 8,750
Inventories 16,500 11,750
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Prepaid insurance 2,500 2,000

Equipment 25,500 33,500
Accumulated depreciation—equipment (16,250) (17,750)
Total assets $55,000 $48,000
Accounts payable $5,000 $6,750

Wages payable 2,000 2,000
Income taxes payable 3,000 1,000
Long-term note payable 0 8,750
Common shares 15,000 15,000
Retained earnings 30,000 14,500
Total liabilities and shareholders’ equity $55,000 $48,000
Additional information:
 Equipment that cost $8,000 was sold for the carrying amount of $3,750.
 Dividends declared and paid were $10,000.
Prepare the operating activities section of a statement of cash flows using the indirect method.
Solution 5-105
Carla Limited
Partial Statement of Cash Flows
Operating activities
Net income $25,500
Depreciation* 2,750
Increase in accounts receivable (3,000)
Increase in inventories (4,750)
Increase in prepaid insurance (500)
Decrease in accounts payable (1,750)
Increase in income taxes payable 2,000
Cash from operating activities $20,250
* Calculation for depreciation:

$8,000 - $3,750 = $4,250 accumulated depreciation on sold asset
$4,250 + $16,250 = $20,500 accumulated depreciation before asset disposal
$20,500 – $17,750 = $2,750 depreciation expense
Difficulty: Medium
AACSB: Analytic
Ex. 5-106 Cash flows from operating activities – indirect method
Titiki Ltd. had the following comparative statement of financial position:

5-54
Titiki Ltd.
As at December 31
2020 2019
Cash $20,500 $12,500
Equipment 102,000 90,000
Total assets $156,500 $147,500

Interest payable 2,000 3,000
Long-term note payable 30,000 34,500
 Net income for the fiscal year was $13,500.

 Equipment that cost $10,000 and was sold for a gain of $1,000 during 2020. The
equipment’s accumulated depreciation was $7,000.
Prepare the operating activities section of a statement of cash flows using the indirect method.
Solution 5-106
Titiki Ltd.
Net income $13,500
Depreciation 17,000
Gain on sale of equipment (1,000)
Decrease in inventories 10,000
Increase in accounts payable 3,000
Decrease in interest payable (1,000)
Increase in wages payable 2,000
Decrease in income taxes payable (1,000)
Difficulty: Medium
5-55

AACSB: Analytic
Ex. 5-107 Cash flows from operating activities – direct method
Carla Limited
Income Statement
Net sales........................................................................................................... $165,000

Cost of goods sold ........................................................................................... 97,500
Gross profit ..................................................................................................... 67,500
Income taxes.................................................................................................... 11,000
Net income....................................................................................................... $ 25,500
Carla Limited.
As at December 31
2020 2019
Cash $15,000 $9,750
Equipment 25,500 33,500
Total assets $55,000 $48,000

 Equipment that cost $8,000 was sold for the carrying amount of $3,750.
5-56
Prepare the operating activities section of a statement of cash flows using the direct method.
Solution 5-107
Carla Limited
Cash received from customers.................................................................... $162,000

Cash paid to suppliers................................................................................. $104,000
Cash paid for operating expenses ............................................................... 25,250
Cash paid for interest.................................................................................. 3,500
Cash paid for income taxes......................................................................... 9,000 $141,750
Net cash provided by operating activities................................................... $20,250
Calculations:
Cash received from customers:
Net sales........................................................ $ 165,000
– Increase in accounts receivable.................. (3,000)
$ 162,000
Cash paid to suppliers:
Cost of goods sold ........................................ $ 97,500
+ Increase in inventory.................................. 4,750
+ Decrease in accounts payable..................... 1,750
...................................................................... $ 104,000
Cash paid for operating expenses:

Operating expenses........................................ $ 27,500
+ Increase in prepaid insurance..................... 500
- Depreciation expense.................................. (2,750)
...................................................................... $ 25,250
Cash paid for interest:

Interest expense............................................. $ 3,500
Cash paid for income tax:

Income tax expense....................................... $ 11,000
- Increase in income tax payable................... 2,000
$ 9,000
Difficulty: Medium
AACSB: Analytic
Ex. 5-108 Statement of cash flows ratios

Financial statements for Comet Ltd. are presented below:
5-57
Comet Ltd.
December 31, 2020
Assets Liabilities & Shareholders’ Equity
Cash.................................................... $ 44,000 Accounts payable................. $ 28,000
Accounts receivable............................ 39,000 Bonds payable...................... 54,000
Buildings and equipment..................... 154,000
Accumulated depreciation—
buildings and equipment.............. (46,000) Common shares.................... 69,000
Patents................................................. 24,000 Retained earnings................. 64,000
$215,000 $215,000
Comet Ltd.
Cash flows from operating activities

Net income..................................................................................... $ 60,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in accounts receivable............................................... $(19,000)
Increase in accounts payable................................................... 7,000
Depreciation—buildings and equipment................................. 12,000
Gain on sale of equipment...................................................... (7,000)
Amortization of patents.......................................................... 3,000 (4,000)
Net cash provided by operating activities.............................................. 56,000
Cash flows from investing activities

Sale of equipment........................................................................... 14,000
Purchase of land............................................................................. (27,000)
Purchase of buildings and equipment............................................. (52,000)
Net cash used by investing activities...................................................... (65,000)
Cash flows from financing activities

Payment of cash dividend............................................................... (25,000)
Sale of bonds.................................................................................. 45,000
Net cash provided by financing activities.............................................. 20,000
Net increase in cash............................................................................... 11,000

Cash, January 1, 2020............................................................................ 33,000
Cash, December 31, 2020...................................................................... $ 44,000
At the beginning of 2020, the accounts payable balance was $21,000, and the bonds payable balance was
$9,000. All of Comet’s bonds have been issued at par.
Instructions
Calculate the following for Comet Ltd.:
a) Current cash debt coverage ratio
b) Cash debt coverage ratio
5-58
c) Free cash flow
Solution 5-108
Net cash provided by operating activities
a) Current cash debt coverage ratio = ——————————————————
Average current liabilities
$56,000 $56,000
= ——————————— = ———— = 2.29:1
($21,000 + $28,000) ÷ 2 $24,500
Net cash provided by operating activities

b) Cash debt coverage ratio = ——————————————————
Average total liabilities
= $56,000 _____ = $56,000 = 1:1

($30,000 + $82,000) ÷ 2 $56,000
c) Free cash flow = Net cash provided by operating activities –

capital expenditures and dividends
= $56,000 – *$79,000 – $25,000 = $(48,000)
*$27,000 + $52,000
Difficulty: Medium
AACSB: Analytic
Ex. 5-109 Calculation of free cash flow and ratio

Dawe Corporation reports the following information:
Net cash provided by operating activities................................................. $285,000
Average current liabilities........................................................................ 150,000
Average long-term liabilities.................................................................... 100,000
Dividends declared................................................................................... 60,000
Capital expenditures................................................................................. 110,000
Payments of debt...................................................................................... 35,000
Instructions
Calculate the following:
a) Cash Debt Coverage Ratio
b) Free Cash Flow
Solution 5-109
a) $285,000 ÷ ($150,000 + $100,000) = 1.14:1
b) $285,000 – $60,000 – $110,000 = $115,000
5-59
Difficulty: Medium
CPA: Finance
AACSB: Analytic
*Ex. 5-110 Calculation of ratios

Keefe Enterprises reported the following:
Net sales................................................................................................... $285,000
Average trade receivables......................................................................... 150,000
Average inventory.................................................................................... 60,000
Average total assets.................................................................................. 110,000
Average current liabilities........................................................................ 35,000
Instructions
Calculate the activity ratios of Keefe Enterprises.
Solution 5-110
a) Receivables turnover: Net sales / Average trade receivables = $285,000 / $150,000 = 1.9:1
b) Inventory turnover: Cost of goods sold / Average inventory = $100,000 / $60,000 = 1.67:1
c) Asset turnover: Net sales / Average total assets = $285,000 / $110,000 = 2.59:1
Difficulty: Medium
CPA: Finance
AACSB: Analytic
*Ex. 5-111 Interpretation of ratios

For each ratio you calculated for Keefe Enterprises in exercise 5-xx explain what the ratio measures and
provide a brief interpretation of the ratio you calculated for Keefe Enterprises.
Solution 5-111
a) Receivables turnover: Liquidity of receivables. Keefe’s receivables are fairly liquid and turnovers 1.9
times per period. This indicates a healthy rate of collection, though we’d need to look more closely at the
customer terms to know this for certain.
b) Inventory turnover: Liquidity of inventory. Keefe’s inventory is also fairly liquid, and is turning over
1.67 times per period.
c) Asset turnover: How efficiently assets are used to generate sales. Keefe appears to make efficient use
of their assets, generating sales at over two times the assets’ value.
Difficulty: Hard
5-60
CPA: Finance
Bloomcode: Evaluation
AACSB: Analytic

A company reported current assets of $120,000 and current liabilities of $150,000.
Instructions
a) Working capital
b) Current ratio
Solution 5-112
(a) Working capital: $120,000 – $150,000 = $30,000 negative
(b) Current ratio: $120,000 / $150,000 = 0.80:1
Difficulty: Medium
CPA: Finance
AACSB: Analytic

A company reported current assets of $450,000, current liabilities of $250,000, and total assets of $1
million.
Instructions
a) Working capital
b) Current ratio
Solution 5-113
(a) Working capital: $450,000 – $250,000 = $200,000
(b) Current ratio: $450,000 / $250,000 = 1.8:1
Difficulty: Medium
CPA: Finance
AACSB: Analytic
5-61
PROBLEMS
Pr. 5-114 Statement of financial position format

The following statement of financial position has been submitted to you by an inexperienced bookkeeper.
List your suggestions for improvements in the format of the statement of financial position. Consider both
terminology deficiencies as well as classification inaccuracies.
Hathaway Industries Inc.

For the Period Ended December 31, 2020
Assets
Fixed Assets—Tangible
Equipment.................................................................. $110,000
Less: reserve for depreciation............................. (40,000) $ 70,000
Factory supplies......................................................... 22,000
Land and buildings..................................................... 400,000
Less: reserve for depreciation............................. (150,000) 250,000
Plant site held for future use....................................... 90,000 $ 432,000
Current Assets
Accounts receivable................................................... 175,000
Cash........................................................................... 80,000
Inventory.................................................................... 220,000
Treasury stock (at cost).............................................. 20,000 495,000
Fixed Assets—Intangible
Goodwill.................................................................... 80,000
Notes receivable......................................................... 40,000
Patents........................................................................ 26,000 146,000
Deferred Charges
Advances to salespersons........................................... 60,000
5-62
Prepaid rent................................................................ 27,000

Returnable containers................................................. 75,000 162,000
TOTAL ASSETS............................................... $1,235,000
Liabilities
Current Liabilities
Accounts payable....................................................... $140,000
Allowance for doubtful accounts............................... 8,000
Common stock dividend distributable........................ 35,000
Income taxes payable................................................. 42,000
Sales taxes payable.................................................... 17,000 $ 242,000
Long-Term Liabilities, 5% debenture bonds, due 2023..... 500,000
Reserve for contingencies.................................................. 150,000 650,000
TOTAL LIABILITIES....................................... 892,000
Equity
Common shares, no par value, issued 12,000 shares with
60 shares held as treasury stock $240,000
Dividends paid (20,000)
Earned surplus 23,000
Other accumulated past earnings 100,000
TOTAL EQUITY 343,000
TOTAL LIABILITIES AND EQUITY $1,235,000
Note 1. The reserve for contingencies has been created by charges to earned surplus and has been
established to provide a cushion for future uncertainties.
Note 2. The inventory account includes only items physically present at the main plant and warehouse.
Items located at the company's branch sales office, amounting to $30,000, are excluded since
the company has consistently followed this procedure for many years.
Solution 5-114
1. The heading should be at a specific date rather than for a period of time.
2. “Fixed Assets – Tangible” and “Reserve for Depreciation” is poor terminology; should be Property,
Plant and Equipment and Accumulated Depreciation.
3. Land and buildings should be segregated into two accounts. The Accumulated Depreciation account
should only be reported for the buildings.
4. Plant site held for future use should be shown in the Investments section.
5. Popular practice lists current assets first; as well, current assets are usually listed in order of liquidity.
Factory supplies should be shown as a current asset.
6. Treasury stock is not an asset, but a deduction from shareholders’ equity.
7. Notes receivable should be reported as a current asset or an investment.
8. The deferred charge items should be reclassified as follows:

Advances to salespersons—current asset
Prepaid rent—current asset
5-63
Returnable containers—current asset
9. Allowance for doubtful accounts should be shown as a contra account to accounts receivable.
10. Common stock dividend distributable should be shown in shareholders’ equity.
11. The debenture bonds should be shown on a separate line below the heading Long-Term Liabilities.
12. Earned surplus is poor terminology. The term "retained earnings" is more appropriate.
13. Other Accumulated Past Earnings is poor terminology. Accumulated Other Comprehensive Income
is the term required by IFRS.
14. “Dividends paid” title is a misnomer. It probably is a “dividends declared” item that should be closed
to retained earnings.
15. No reference in the body of the statement is made to the notes. The order of the notes is wrong.
16. Note 2 indicates that the inventory account is understated by $30,000. Inventory and earned surplus
amounts should both be adjusted by increasing them by $30,000.
17. Specific identification and description of all significant accounting principles and methods that
involve selection from among alternatives and/or those that are peculiar to a given industry should be
disclosed in the annual report.
18. Goodwill should be listed as an asset by itself. It is not an intangible asset.
Difficulty: Medium
AACSB: Analytic
Pr. 5-115 Statement of financial position presentation

The following statement of financial position was prepared by the bookkeeper for Badger Corp. at
December 31, 2020.
Badger Corp.
December 31, 2020
Cash.......................................... $ 90,000 Accounts payable........................... $ 75,000
Accounts receivable (net).......... 52,200 Long-term liabilities....................... 110,000
Inventories................................ 57,000 Shareholders’ equity....................... 208,500
Investments............................... 76,300
Equipment (net)........................ 86,000
Patents....................................... 32,000 ________
.................................................. $393,500 $393,500
The following additional information is provided:

1. “Cash” includes prepaid insurance of $9,400; as well, a bank overdraft of $1,500 has been deducted.
5-64
2. The net accounts receivable balance includes:

(a) accounts receivable—debit balances $62,000;
(b) accounts receivable—credit balances $5,000;
(c) allowance for doubtful accounts $4,800.
3. Inventories do not include goods costing $5,000 shipped out on consignment. Receivables of $5,000
were recorded on these goods.
4. Investments include investments in common shares, trading $24,000 and long-term $43,300, and
franchises $9,000.
5. Equipment costing $8,000 with accumulated depreciation $6,000 is no longer used and is held for
sale. Accumulated depreciation on the other equipment is $40,000.
Instructions
Prepare a statement of financial position in good form (shareholders’ equity details can be omitted.)
Solution 5-115
Badger Corp.
December 31, 2020
Assets
Current assets
Cash.......................................................................................... $ 82,100 (1)
Trading securities...................................................................... 24,000
Accounts receivable.................................................................. $ 57,000 (2)
Less allowance for doubtful accounts........................................ 4,800 52,200
Inventories................................................................................. 62,000 (3)
Prepaid insurance...................................................................... 9,400
*Equipment held for sale........................................................... 2,000 (4)
Total current assets.............................................................. 231,700
Investments
Long-term securities.................................................................. 43,300
Property, plant, and equipment

Equipment................................................................................. 124,000 (5)
Less accumulated depreciation.................................................. 40,000 84,000
Intangible assets
Patents....................................................................................... 32,000
Franchises................................................................................. 9,000 41,000
Total assets........................................................................... $400,000
Liabilities and Shareholders’ Equity

Current liabilities
Accounts payable...................................................................... $ 80,000 (6)
Bank overdraft........................................................................... 1,500
Total current liabilities......................................................... 81,500
Long-term liabilities......................................................................... 110,000

Total liabilities.......................................................................... 191,500
5-65
Shareholders’ equity......................................................................... 208,500

Total liabilities and shareholders’ equity................................... $400,000
(1) ($90,000 – $9,400 + $1,500)

(2) ($62,000 – $5,000)
(3) ($57,000 + $5,000)
(4) ($8,000 – $6,000)
(5) ($86,000 + $40,000 – $8,000 + $6,000)
(6) ($75,000 + $5,000)
*An alternative is to show this as an “other asset.”
Difficulty: Medium
AACSB: Analytic
Pr. 5-116 Calculation of ending retained earnings

The records of Biloxi Corp. for calendar 2020 reflected the following correct pre-tax amounts: gain from
discontinued operations, $50,000; cash dividends declared and paid, $45,000; retained earnings, January
1, 2020, $275,000, correction of accounting error, $35,000 debit; income before income taxes and before
discontinued operations, $165,000. The average income tax rate of 40% applies to all items except the
dividends.
Instructions
Calculate the December 31, 2020 ending balance of retained earnings.
Solution 5-116
Beginning balance..................................................................................... $275,000
Correction of error ($35,000 x 60%)......................................................... (21,000)
Income ($165,000 x 60%)......................................................................... 99,000
Gain from discontinued operations ($50,000 x 60%)................................ 30,000
Dividends.................................................................................................. (45,000)
Ending balance.......................................................................................... $338,000
Difficulty: Medium
AACSB: Analytic
Pr. 5-117 Statement of cash flows – direct method

The controller of Nebula Corporation has provided you with the following information:
Nebula Corporation
Income Statement
Net sales........................................................................................................... $620,000

5-66

Other revenues and expenses
Gain on sale of equipment........................................................................ 30,000
Interest expense........................................................................................ 8,000 22,000
Income taxes.................................................................................................... 92,800
Net income....................................................................................................... $139,200
Nebula Corporation
Comparative Account Information
Relating to Operations
2020 2019
Accounts payable 59,000 47,000
Interest payable 600 1,500
Unearned revenue 20,000 14,000
Instructions
Prepare a statement of cash flows (for operating activities only) for the year ended December 31, 2020,
using the direct method.
Solution 5-117
Nebula Corporation
Cash received from customers.................................................................... $610,000

Cash paid
For operating expenses........................................................................ $397,000
For interest.......................................................................................... 8,900
For income taxes................................................................................. 94,600 $500,500
Net cash provided by operating activities................................................... $109,500
Calculations:
Net sales........................................................ $ 620,000
+ Increase in unearned revenue..................... 6,000
$ 610,000
– Decrease in prepaid insurance.................... (1,000)
– Increase in accounts payable...................... (12,000)
$ 397,000
5-67

+ Decrease in interest payable....................... 900
$ 8,900
+ Decrease in income tax payable................. 1,800
$ 94,600
Difficulty: Medium
CPA: Taxation
AACSB: Analytic
Pr. 5-118 Statement of cash Flows – indirect method

Use the information provided in Pr. 5-113. Prepare a statement of cash flows (for operating activities
only) for the year ended December 31, 2020 using the indirect method.
Solution 5-118
Nebula Corporation
Cash flows from operating activities

Net income................................................................................... $139,200
Adjustments:
Gain on sale of equipment........................................................... (30,000)
Increase in accounts receivable.................................................... (16,000)
Decrease in prepaid insurance...................................................... 1,000
Increase in accounts payable........................................................ 12,000
Decrease in interest payable......................................................... (900)
Decrease in income taxes payable................................................ (1,800)
Increase in unearned revenue....................................................... 6,000
Net cash provided by operating activities.................................... $109,500
Difficulty: Medium
AACSB: Analytic
*Pr. 5-119 Calculation of ratios

Brandon Systems Inc. has provided you with the following information:
2020 2019
Cash......................................................................... $ 21,000 $ 47,000
5-68
Short-term (trading) investments....................... 28,000 –

Accounts receivable........................................... 102,000 116,000
Inventory............................................................ 86,000 64,000
Prepaid expenses............................................... 11,000 9,000
Total assets........................................................ 1,503,000 1,489,000
Total current liabilities...................................... 205,000 241,000
Net sales, all on credit............................................. 877,000 850,000
Cost of goods sold................................................... 570,000 555,000
Operating income.................................................... 165,000 158,000
Income tax expense................................................. 20,000 18,000
Net income.............................................................. 109,000 100,000
Interest expense....................................................... 36,000 40,000
Common shares (no preferred) ............................... 420,000 420,000
Retained earnings.................................................... 153,000 74,000
Instructions
Calculate the following ratios for 2020. Round all values to two decimals, including percentages, e.g.,
12.34, 34.56%. Show all calculations.
a) Profit margin on sales
b) Quick (acid-test) ratio
c) Receivables turnover
d) Debt to total assets
e) Times interest earned
f) Rate of return on assets
g) Rate of return on common share equity
Solution 5-119
a) Profit margin on sales = Net income/net sales x 100 =
109,000 x 100 = 12.43%
877,000
b) Quick (acid-test) ratio = Quick assets/current liabilities

= 21,000 + 28,000 + 102,000 =.74 to 1
205,000
c) Receivables turnover = Net sales/average A/R

= _ 877,000 _ = 8.05 (times)
(102,000 + 116,000)/2
d) Debt to total assets = Total liabilities/total assets x 100

= 930,000 x 100 = 61.88%
1,503,000
Total liabilities = 1,503,000 – 420,000 – 153,000 = 930,000
e) Times interest earned = Net income before interest and income taxes/interest exp
= 109,000 + 36,000 + 20,000 (i.e., operating income) = 4.58 (times)
36,000
5-69
f) Rate of return on assets = Net income/average total assets

= 109,000 x 100 = 7.29%
1,496,000
average total assets = (1,503,000 + 1,489,000)/2 = 1,496,000
g) Rate of return on common share equity = NI/average common S/H equity x 100
= 109,000 x 100 = 20.43%

533,500
Average equity = (420,000 + 420,000 + 153,000 + 74,000)/2 = 533,500
Difficulty: Medium
CPA: Taxation
AACSB: Analytic
Pr. 5-120 Statement of cash flows – indirect method
Titiki Ltd. had the following comparative statement of financial position:
Titiki Ltd.
As at December 31
2020 2019
Cash $20,500 $12,500
Equipment 102,000 90,000
Total assets $156,500 $147,500

Interest payable 2,000 3,000
Long-term note payable 30,000 34,500
 Net income for the fiscal year was $13,500.
5-70
 Equipment that cost $10,000 and was sold for a gain of $1,000 during 2020. The
equipment’s accumulated depreciation was $7,000.
Prepare the statement of cash flows using the indirect format.
Solution 5-120
Titiki Ltd.
Net income $13,500
Depreciation 17,000
Gain on sale of equipment (1,000)
Decrease in inventories 10,000
Increase in accounts payable 3,000
Increase in wages payable 2,000
Decrease in interest payable (1,000)
Decrease in income taxes payable (1,000)
Investing activities
Proceeds from sale of equipment $4,000
Purchase of equipment (22,000)
Net cash used by investing activities (18,000)
Financing activities
Cash dividends (18,000 + 13,500 – 28,500) (3,000)
Repayment of notes payable - long term (4,500)
Net cash used by financing activities (7,500)
Net increase in cash 8,000
Cash at beginning of year 12,500
Cash at end of year $20,500
Difficulty: Medium
AACSB: Analytic
Pr. 5-121 Statement of cash flows – direct method
5-71
Carla Limited
Income Statement
Net sales........................................................................................................... $165,000

Cost of Goods Sold ......................................................................................... 97,500
Gross Profit ..................................................................................................... 67,500
Income taxes.................................................................................................... 11,000
Net income....................................................................................................... $ 25,500
Carla Limited.
As at December 31
2020 2019
Cash $15,000 $9,750
Equipment 25,500 33,500
Total assets $55,000 $48,000

 Equipment that cost $8,000 was sold for its carrying amount of $3,750.
Prepare the statement of cash flows using the direct method.
Solution 5-121
Carla Limited
5-72
Cash received from customers............................................................. $162,000
Cash paid to suppliers.......................................................................... $104,000
Cash paid for operating expenses ....................................................... 25,250
Cash paid for interest........................................................................... 3,500
Cash paid for income taxes.................................................................. 9,000 141,750
Net cash provided by operating activities..................................... 20,250
Investing activities
Sale of equipment..................................................................................... $3,750
Net cash provided by investing activities.......................................... 3,750
Financing activities
Redemption of note payable..................................................................... $(8,750)
Payment of cash dividends....................................................................... (10,000)
Net cash used by financing activities................................................ (18,750)
Net increase in cash......................................................................................... 5,250

Cash, January 1................................................................................................ 9,750
Cash, December 31.......................................................................................... $ 15,000
Calculations:
Net sales........................................................ $ 165,000
$ 162,000
Cash paid to suppliers:
Cost of goods sold ........................................ $ 97,500
+ Increase in inventories................................ 4,750
+ Decrease in accounts payable..................... 1,750
...................................................................... $ 104,000

+ Increase in prepaid insurance..................... 500
- Depreciation expense.................................. (2,750)
...................................................................... $ 25,250


- Increase in income tax payable................... 2,000
$ 9,000
Difficulty: Medium
5-73
AACSB: Analytic
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Copyright © 2019 by John Wiley & Sons Canada, Ltd. or related companies. All rights
reserved.
The data contained in these files are protected by copyright. This manual is furnished under
licence and may be used only in accordance with the terms of such licence.
The material provided herein may not be downloaded, reproduced, stored in a retrieval system,
modified, made available on a network, used to create derivative works, or transmitted in any
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without the prior written permission of John Wiley & Sons Canada, Ltd.
MMXVIII vii F1
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What are the major classifications of a statement of financial position?

What are the major classifications of a statement of financial position?

What are the major disclosure techniques for the statement of financial position?

What are the major disclosure techniques for the statement of financial position?

Test Bank for Intermediate Accounting, Twelfth Canadian Edition

CHAPTER STUDY OBJECTIVES

MULTIPLE CHOICE QUESTIONS

c 19. Classification of securities

a 70. New conceptual framework

*This topic is dealt with in an Appendix to the chapter.

E5-78 Earnings quality

*This topic is dealt with in an Appendix to the chapter.

P5-114 Statement of financial position format

*This topic is dealt with in an Appendix to the chapter.

MULTIPLE CHOICE QUESTIONS

2. Which of the following is a limitation of the balance sheet?

6. An enterprise’s ability to pay its debts and related interest is called

9. Which of the following is NOT a limitation of the statement of financial position?

10. Monetary assets represent

11. Monetary assets include

CPA: Financial Reporting

12. Financial instruments do NOT include

13. Non-monetary assets include

14. Non-monetary assets

b) the accounting cycle or one year, whichever is longer.

16. The operating cycle is the time between

17. Which of the following is a current asset?

20. Which of the following statements about intangible assets is INCORRECT?

21. Which of the following is NOT a current liability?

22. Working capital is

23. An example of an item which is NOT an element of working capital is

24. Which of the following statements best describes a liability?

25. Which of the following should be EXCLUDED from long-term liabilities?

Learning Objective: Prepare a classified statement of financial position.

29. Receivables are valued based on their ______.

Use the following information for questions 31–33.

39. Which of the following is a contra account?

40. Significant accounting policies may NOT be

57. SingSong Corporation reports the following information:

60. A measure of a company’s financial flexibility is the

CPA: Financial Reporting

63. A company that follows ASPE

64. A company that follows IFRS

67. Some companies following IFRS list current assets in

*74. Net sales divided by average total assets is called

*77. Financial or capital market risks are related to

Ex. 5-78 Earnings quality

Ex. 5-79 Creditworthiness; debt to total assets

Ex. 5-80 Liquidity, solvency, and financial flexibility

Ex. 5-81 Limitations of the statement of financial position

Ex. 5-82 Terminology

1. A company's ability to take effective ______

2. Claims to future cash flows that are ______

3. Short-term, highly liquid investments ______

4. Assets that are held for sale in the ______

5. Expenditures already made for benefits ______

6. Assets of physical substance that are ______

7. Assets that have no physical substance ______

8. The excess of total current assets over ______

1. Common shares _ 8. Long-term bonds payable