CH 05

CHAPTER 5
Statement of Financial Position and

Statement of Cash Flows
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Brief Concepts
Topics Questions Exercises Exercises Problems for
Analysis
1. Disclosure 1, 2, 3, 4, 4, 5
principles, uses of 5, 6, 7, 10,
the statement of 18, 21, 29,
financial position, 30
financial
flexibility.
2. Classification of 11, 12, 13, 1, 2, 3, 4, 1, 2, 3, 8, 1, 2, 3

items in the 14, 15, 16, 5, 6, 7, 8, 9, 10
statement of 18, 19 9, 10, 11
financial position
and other
financial
statements.
3. Preparation of 4, 7, 8, 9, 4, 5, 6, 7, 1, 2, 3, 4, 3, 4, 5
statement of 16, 17, 20 11, 12, 17 5, 6, 7
financial position;
issues of format,
terminology, and
valuation.
4. Statement of cash 21, 22, 23, 12, 13, 14, 13, 14, 15, 6, 7 6
flows. 24, 25, 26, 15, 16 16, 17, 18
27, 28
5. Convergence. 31, 32, 33
Copyright 2011 John Wiley & Sons, Inc.Kieso Intermediate: IFRS Edition, Instructors Manual 5-1
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING
OBJECTIVE)
Brief
Learning Objectives Exercises Exercises Problems
1. Explain the uses and limitations of a 7

statement of financial position.
2. Identify the major classifications of 1, 2, 3,

the 4, 8, 9
3. Prepare a classified statement of 1, 2, 3, 4, 5, 1, 2, 3, 4, 5, 1, 2, 3, 4,

financial position using the report and 6, 7, 8, 9, 6, 7, 9, 10, 5, 6, 7
account 10, 11 11, 12, 17
formats.
4. Indicate the purpose of the statement

of cash flows.
5. Identify the content of the statement 13

of cash flows.
6. Prepare a basic statement of cash 12, 13, 14, 14, 15, 16, 6, 7
flows. 15 17, 18
7. Understand the usefulness of the 16 15, 16, 18 6, 7

statement
of cash flows.
8. Determine additional information

requiring note disclosure.
9. Describe the major disclosure

techniques
for financial statements.
5-2 Copyright 2010 John Wiley & Sons, Inc.Kieso, Intermediate: IFRS Edition, Instructors Manual
ASSIGNMENT CHARACTERISTICS TABLE
Level of Time
It Description Diffi (min
e culty utes
m )
E5-1 Statement of financial position classifications. Simple 1520
E5-2 Classification of statement of financial position Simple 1520
accounts.
E5-3 Classification of statement of financial position Simple 1520
accounts.
E5-4 Preparation of a classified statement of Simple 3035
financial position.
E5-5 Preparation of a corrected statement of Simple 3035
financial position.
E5-6 Corrections of a statement of financial Complex 3035
position.
E5-7 Current assets section of the statement of Moderate 1520
financial position.
E5-8 Current vs. non-current liabilities. Moderate 1015
E5-9 Current assets and current liabilities. Complex 3035
E5-10 Current liabilities. Moderate 1520
E5-11 Statement of financial position preparation. Moderate 2530
E5-12 Preparation of a statement of financial Moderate 3035
position.
E5-13 Statement of cash flowsclassifications. Moderate 1520
E5-14 Preparation of a statement of cash flows. Moderate 2535
E5-17 Preparation of a statement of cash flows and a Moderate 3035
E5-18 Preparation of a statement of cash flows, Moderate 2535
analysis.
P5-1 Preparation of a classified statement of

financial position, periodic inventory. Mod 30
erat 35
e
P5-2 Statement of financial position preparation. Moderate 3540
P5-3 Statement of financial position adjustment and Moderate 4045
preparation.
P5-4 Preparation of a corrected statement of Complex 4045
financial position.
P5-5 Statement of financial position adjustment and Complex 4050
preparation.
P5-6 Preparation of a statement of cash flows and
a statement of financial position. Com 35
plex 45
P5-7 Preparation of a statement of cash flows and
Com 40
a statement of financial position. plex 50
CA5-1 Reporting the financial effects of varied Moderate 2025

transactions.
CA5-2 Current asset and liability classification. Moderate 2530
CA5-3 Identifying statement of financial position Moderate 3035
deficiencies.
CA5-4 Critique of statement of financial position format Simple 2025
and content.
CA5-5 Presentation of property, plant, and equipment. Simple 2025
CA5-6 Cash flow analysis. Complex 4050
LEARNING OBJECTIVES
1. Explain the uses and limitations of a statement of financial position.

2. Identify the major classifications of the statement of financial
position.
3. Prepare a classified statement of financial position using the report and
account formats.
4. Indicate the purpose of the statement of cash flows.
5. Identify the content of the statement of cash flows.
6. Prepare a basic statement of cash flows.
7. Understand the usefulness of the statement of cash flows.
8. Determine additional information requiring note disclosure.
9. Describe the major disclosure techniques for financial statements.
*10. Identify the major types of financial ratios and what they measure.
CHAPTER REVIEW
*Note:All asterisked (*) items relate to material contained in the Appendix

to the chapter.
1. Chapter 5 presents a detailed discussion of the concepts and

techniques that underlie the preparation and analysis of the statement
of financial position. Along with the mechanics of preparation,
acceptable disclosure requirements are examined and illustrated. A brief
introduction to the statement of cash flows is also presented. This
explanation serves as a foundation for the more comprehensive
discussion of this subject presented in Chapter 23. At the end of Chapter
5, a multi-page illustration of the financial statements and
accompanying notes of a corporation is presented. This illustration may
be referred to throughout your study of intermediate accounting as it
includes information relevant to many of the topics discussed in
subsequent chapters.
Statement of Financial Position
2. (L.O. 1)For many years financial statement users generally considered

the income statement to be superior to the statement of financial
position as a basis for judging the economic well-being of an enterprise.
However, the statement of financial position can be a very useful financial
statement. If a statement of financial position is examined carefully, users
can gain a considerable amount of information related to liquidity,
solvency and financial flexibility. Liquidity is generally related to the
amount of time that is expected to elapse until an asset is realized or
otherwise converted into cash or until a liability has to be paid.
Solvency refers to the ability of an enterprise to pay its debts as they
mature. Financial flexibility is the ability of an enterprise to take
effective action to alter the amounts and timing of cash flow so that it
can respond to unexpected needs and opportunities.
3. Criticism of the statement of financial position has revolved around the

limitations of the information presented therein. These limitations
include: (a) failure to reflect current value information, (b) the extensive
use of estimates, and (c) failure to include items of financial value that
cannot be recorded objectively.
4. The problem with current value information concerns the reliability of

such information. The estimation process involved in developing
current-value type information causes
a concern about the objectivity of the resulting financial information.
The use of estimates is extensive in the development of statement of
financial position data. These estimates are required by IFRS, but
reflect a limitation of the statement of financial position. The limitation
concerns the fact that the estimates are only as good as the
understanding and objectivity of the person(s) making the estimates.
The final limitation of the statement of financial position concerns the
fact that some significant assets of the entity are not recorded. Items
such as human resources (employee workforce), managerial skills,
customer base, and reputation are not recorded because such assets are
difficult to quantify.
5. (L.O. 2)The major classifications used in the statement of financial
position are assets, liabilities, and equity. These items were defined in
the discussion presented in Chapter 2. To provide the financial statement
reader with additional information, these major classifications are
divided into several subclassifications. Assets are further classified as
non-current or current, with the non-current divided among investments;
property, plant, and equipment; intangible assets; and other assets.
Liabilities are classified as non-current or current. Equity includes share
capital, share premium, and retained earnings. These items are defined
as follows:
Assets.Probable future economic benefits obtained or controlled by a

particular entity as a result of past transactions or events.
Liabilities.Probable future sacrifices of economic benefits arising from

present obligations of a particular entity to transfer assets or provide
services to other entities in the future as
a result of past transactions or events.
Equity.Residual interest in the assets of an entity that remains after

deducting its liabilities. In a business enterprise, the equity is the
ownership interest.
6. Items classified as long-term investments (or simply investments) in the

assets section of the statement of financial position normally are one of
four types. These include:
a. Investments in securities, such as ordinary shares, bonds, or long-

term notes.
b. Investments in tangible assets not currently used in operations.
c. Investments set aside in special funds (sinking, pension, plant

expansion, etc.).
d. Investments in nonconsolidated subsidiaries or associated

companies.
7. Companies group investments in debt and equity securities into three

separate portfolios for valuation and reporting purposes.
a. Held-for-collection. Debt securities that a company has a positive

intent and ability to hold to maturity. They are reported at amortized
cost. Individual securities are classified as non-current or current,
depending on circumstances.
b. Trading. Also referred to as fair value through profit or loss securities.

Debt and equity securities bought and held primarily for sale in the
near term. They are reported at fair value. The portfolio is classified
as current assets.
c. Non-trading equity. Equity securities not classified as held-to-

maturity or trading securities. They are reported at fair value.
Individual securities are classified as non-current or current,
depending on circumstances.
8. Property, plant and equipment are properties of a durable nature that
are used in the regular operations of the enterprise. Examples include
land, buildings, machinery, furniture, tools, and wasting resources. With
the exception of land, these assets are either depreciable or depletable.
9. Intangible assets lack physical substance; however, their benefit lies in

the rights they convey to the holder. Examples include patents,
copyrights, franchises, goodwill, trademarks, trade names, and customer
lists.
10. Limited-life intangible assets are amortized over their useful lives.
Indefinite-life intangibles (such as goodwill) are not amortized but,
instead, are assessed at least annually for impairment.
11. Many companies include an Other Assets classification in the

statement of financial position after Intangible Assets. This section
includes a wide variety of items that do not appear to fall clearly into
one of the other classifications. Some of the more common items
included in this section are: long-term prepaid expenses, prepaid
pension cost, non-current receivables, assets in special funds, and
restricted cash or securities.
12. Current assets are cash and other assets expected to be converted into
cash, sold, or consumed either in one year or in the operating cycle,
whichever is longer. There are some exceptions to a literal interpretation
of the current asset definition. These exceptions involve prepaid
expenses, available-in-sale securities, and the subsequent years
depreciation of fixed assets. These exceptions are recognized in the
accounting process and are understood by most financial statement
users. Current assets normal include inventories, receivables, prepaid
expenses, short-term investments, cash and cash equivalents. Their
basis of valuation are:
a. Inventories. Are reported at the lower-of-cost-or-net-realizable value

and the cost flow assumption (FIFO or weighted-average) is
disclosed.
b. Receivables. Are reported at their net realizable value. Major

categories of receivables should be shown in the statement of
financial position or the related notes.
c. Prepaid Expenses. Are reported at their cost.
d. Short-term Investments. Includes trading securities and held-for-

collection and non-trading equity securities that will mature or be
sold within twelve months or the normal operating cycle, whichever
is longer. Held-for-collection securities are reported at amortized
5-10 Copyright 2010 John Wiley & Sons, Inc.Kieso, Intermediate: IFRS Edition, Instructors
Manual
cost. Trading and non-trading equity securities are reported at fair
value.
e. Cash and Cash Equivalents. Cash includes currency and demand

deposits. Cash equivalents are short-term, highly liquid investments
that will mature within three months. Cash and cash equivalents are
reported as approximating fair value. Any restrictions or
commitments related to the availability of cash must be disclosed.
13. The Equity (also referred to as Shareholders Equity) section is difficult
to prepare and understand because of the complexity of capital share
agreements, restrictions on equity imposed by corporation law, liability
agreements, and boards of directors. It consists of six parts.
a. Share capital. The par or stated value of shares issued. It includes

ordinary shares and preference shares.
b. Share premium. The excess of amounts paid-in over the par or stated
value.
c. Retained earnings. The corporations undistributed earnings. It may be

divided between the unappropriated and restricted amounts.
d. Accumulated other comprehensive income. Also referred to as

reserves or other reserves, includes such items as unrealized gains
and losses on available-for-sale securities and unrealized gains and
losses on certain derivative transactions.
e. Treasury shares. The amount of share capital repurchased.
f. Non-controlling interest (Minority interest). A portion of the equity of

subsidiaries not owned by the reporting company.
14. Non-current liabilities are obligations whose settlement date extends

beyond the normal operating cycle or one year, whichever is longer.
Examples include bonds payable, notes payable, lease obligations, and
pension obligations. Generally, the disclosure requirements for long-
term liabilities are quite substantial as a result of various covenants and
restrictions included for the protection of the lenders. Long-term
liabilities that mature within the current operating cycle are classified
as current liabilities if their liquidation requires use of current assets.
Long-term liabilities generally fall into one of the three following
categories:
a. Obligations arising from specific financing situations, such as the

issuance of bonds, long-term lease obligations, and long-term notes
payable.
b. Obligations arising from the ordinary operations of the company such

as pension obligations and deferred income tax liabilities.
c. Obligations that depend on the occurrence or non-occurrence of one

or more future events to confirm the amount payable, or the date
payable, such as product warranties often referred to as provisions.
5-12Copyright 2010 John Wiley & Sons, Inc.Kieso, Intermediate: IFRS Edition, Instructors Manual
15. Current liabilities are the obligations that are reasonably expected to be
liquidated either through the use of current assets or the creation of
other current liabilities. Items normally shown in the current liabilities
section of the statement of financial position include notes and
accounts payable, advances received from customers, current
maturities of long-term debt, taxes payable, and accrued liabilities.
Obligations due to be paid during the next year may be excluded from
the current liability section if the item is expected to be refinanced
through long-term debt or the item will be paid out of non-current
assets.
16. Working capital is the excess of current assets over current liabilities.
This concept, sometimes referred to as net working capital, represents
the net amount of a companys relatively liquid resources. By reference
to this amount, a financial statement user is able to assess the entitys
margin of safety for meeting financial demands of the operating cycle.
While the amount of working capital has a definite relationship to
liquidity, the reader must analyze the composition of the current assets
to determine their nearness to cash.
17. (L.O. 3)IFRS do not specify the order or format in which a company
presents items in the statement of financial position. The account
format of a classified statement of financial position lists assets by
sections on the left side and liabilities and equity by sections on the
right side. The report format lists equity and liabilities directly below
assets on the same page.
18. (L.O. 4)The primary purpose of a statement of cash flows is to provide

relevant information about the cash receipts and cash payments of an
enterprise during a period. The statement of financial position, income
statement, and statement of changes in equity do not provide a
convenient source of information on cash flows.
19. (L.O. 5)In accomplishing its purpose, the statement focuses attention
on three different activities related to cash flows.
a. Operating activities involve the cash effects of transactions that enter

into determination of net income.
b. Investing activities include making and collecting loans and

acquiring and disposing of debt and equity investments and property,
plant, and equipment.
c. Financing activities involve liability and owners equity items and

include (1) obtaining resources from owners and providing them with
return on their investment and
(2) borrowing money from creditors and repaying the amounts
borrowed.
The basic format of the statement of cash flows is shown below.
Cash flows from operating activities... $XXX

Cash flows from investing activities.... XXX
Manual
Cash flows from financing activities. . . XXX
Net increase (decrease) in cash.......... XXX
Cash at beginning of year..................... XXX
Cash at end of year............................... $XXX
20. The statements value is that it helps users evaluate liquidity, solvency,
and financial flexibility. Liquidity refers to the nearness to cash of
assets and liabilities. Solvency is the firms ability to pay its debts as
they mature. Financial flexibility is a companys ability to respond and
adapt to financial adversity and unexpected needs and opportunities.
21. (S.O. 6)The information to prepare the statement of cash flows comes
from three sources: (a) comparative statement of financial position, (b)
the current income statement, and
(c) selected transaction data. Preparation of the statement of cash flows
involves the following steps.
a. Determine the cash provided by or used in operations.
b. Determine the cash provided by or used in investing and financing

activities.
c. Determine the change (increase or decrease) in cash during the

period.
d. Reconcile the change in cash with the beginning and the ending cash
balances.
The information included in this chapter on the preparation of the

statement of cash flows provides a basic introduction to the concepts
involved. A complete and detailed presentation of the statement of cash
flows is found in Chapter 23 of the text.
22. (S.O. 7)Creditors look for answers to the following questions in the
companys cash flow statement:
a. How successful is the company in generating net cash provided by

operating activities?
b. What are the trends in net cash flow provided by operating activities
over time?
c. What are the major reasons for the positive or negative net cash
provided by operating activities?
23. The current cash debt coverage ratio is:
Net Cash Provided Average Current Cash

=
by
Copyright Operating
2011 Current
John Wiley & Sons, Inc.Kieso Debt Manual 5-15
Intermediate: IFRS Edition, Instructors
Activities Liabilities Coverage Ratio
24. The cash debt coverage ratio is:
Net Cash Provided Average Total Cash Debt

=
by Operating Liabilities Coverage Ratio
Activities
25. Free cash flow is the amount of discretionary cash flow a company has
for purchasing additional investments, retiring its debt, purchasing
treasury stock, or simply adding to its liquidity.
Net Cash Provided (Capital

= Free Cash Flow
by Operating Expenditures
Activities + Dividends)
Manual
26. (L.O. 8)Companies must provide comparative information in addition to
the current years financial statements, i.e., two complete sets of
financial statements and related notes. The notes to the financial
statements can provide supplemental data of a quantitative nature to
expand the information in the financial statements and explain
restrictions imposed by financial arrangements or basic contractual
agreements.
27. Generally the first note to the financial statements is a Summary of

Significant Accounting Policies. The IASB recommends disclosure for all
significant accounting principles and methods that involve selection
from among alternatives or those that are peculiar to a given industry.
28. In addition, the IFRSs require many specific disclosures concerning

such items as property, plant, and equipment, receivables, inventories,
employee benefits, and equity capital and reserves. Companies are also
required to reconcile the balances of many assets and liabilities
reported in the financial statements from the beginning of the year to
the end of the year.
29. (L.O. 9)Effective communication of the information required to be

disclosed in financial statements is an important consideration.
Accountants have developed certain methods that have proven useful in
disclosing pertinent information. The methods are parenthetical
explanations, cross reference and contra items, and adjunct accounts.
Numerous examples of the techniques of disclosure are presented in
the text. These examples should be reviewed as they represent
concepts referred to in subsequent chapter material.
30. Other important issues related to the presentation of information in the

financial statements include offsetting, consistency, and fair
presentation. Offsetting is not permitted unless a specific IFRS permits
it. As a part of comparability, the Framework requires that companies
follow consistent principles and methods from one period to the next.
Companies must present fairly the financial position, financial
performance, and cash flows of the company. It is presumed that the
use of IFRS with appropriate disclosure results in financial statements
that are fairly presented.
*31.(L.O. 10) Appendix 5A Ratio AnalysisA Reference demonstrates various

ratios used to analyze financial performance.
LECTURE OUTLINE
It should be emphasized that this chapter is a review chapter and the intent
is to provide
an overview for topics that will be dealt with in greater detail in later
chapters.
As a review of Chapters 4 and 5, we recommend that you encourage

students to examine
a set of actual financial statements and the accompanying notes. Appendix
5-B in the text contains specimen financial statements for the Marks and
Spencer Group.
The material in the chapter can be covered in two class sessions. The first
session can be used for lecture on the concepts covered in the chapter.
Most students should have had previous exposure to these concepts. The
first session can also be used for reviewing some of the shorter problem
material such as Exercises 5-1 through 5-4 and Cases 5-1 through 5-3. You
may wish to call upon students for their answers to the items in these cases
and exercises. Most items are straightforward, but some of them will
stimulate class discussion and highlight areas of misunderstanding.
The second class session can be used for final review and for going over the
longer problem material. This material allows students to apply chapter
concepts by critiquing and preparing financial statements.
TEACHING TIP
As a comprehensive review of Chapters 4 and 5, use Illustration 5-7 to
discuss the specimen financial statements of the Marks and Spencer
Group that appear in Appendix 5-B in the textbook. Reproduce and
distribute Illustration 5-7. The exercise can be used as either an in-class
assignment or as a homework assignment. You should point out to the
students that the statement formats and account classifications shown in
the chapter are in accordance with IFRS. However, many companies are
free to use any format they wish, as long as they comply with disclosure.
The following lecture outline is appropriate for the chapter.
A. (L.O. 1)Usefulness and Purpose of the statement of financial position.

1. Provides information about entitys assets, liabilities, and equity.
2. Evaluation of liquidity, solvency, and financial flexibility.
3. Aids in assessing risk and predicting future cash flows.
B. Limitations of the Balance Sheet.
Manual
1. Current value is not reflected.
2. Estimates and judgments must be utilized:
a. in determining the collectibility of receivables.

b. in assessing the salability of inventory.
c. in determining the useful lives of long-term assets.
3. Omits many items that are of financial value to the business.
a. Assets such as the value of a companys human resources and

research and development are not reported.
b. Some liabilities or commitments such as leases and certain

contractual arrangements are reported in an off balance sheet
manner.
C. (L.O. 2)Classifications in the statement of financial position. Review

definitions on text page 192.
TEACHING TIP
Illustration 5-1 can be used in a discussion of the major classifications and
subclassifications in the balance sheet.
1. Assets.
2. Liabilities.
3. Equity.
D. Major Subclassifications in the Balance Sheet.
1. Long-term investmentsmanagement intent is to hold these

investments for an extended period of time.
a. Investments in securities: bonds, common stock, long-term notes.
b. Investments in tangible fixed assets not currently used in

operations: land held for speculation.
c. Investments set aside in special funds: sinking funds, pension funds,

plant expansion funds.
d. Investments in nonconsolidated subsidiaries or affiliated

companies.
e. Types of investment portfolios used for valuation and reporting

purposes:
(1) Held-to-maturity: reported at amortized cost and classified as

current or non-current asset, depending on circumstances.
(2) Trading: reported at fair value and classified as current asset.
(3) Non-trading equity: reported at fair value and classified as

current or non-current asset, depending on circumstances.
Manual
2. Property, plant, and equipmentdurable physical property such as
land, buildings, machinery, furniture, and wasting resources
(timberland, minerals) used in operations.
a. Most assets in this category are either depreciable (e.g.,

buildings) or consumable (e.g., timberlands). Land is not
depreciated. However, land improvements are depreciated.
b. Long-lived costly tools are usually included in this category. In

practice, small tools are frequently expensed when purchased or
are included as inventoriable current assets.
c. The basis of valuation (e.g., historical cost), any liens against the
property, and accumulated depreciation or depletion must be
disclosed.
d. In practice, a detailed classification of property, plant, and

equipment is disclosed in a supplementary schedule rather than
on the face of the balance sheet.
3. Intangible assetsresources that lack physical substance and are

not financial instruments but provide economic rights and
advantages.
a. Examples include patents, franchises, copyrights, goodwill,
trademarks, trade names, and customer lists.
b. Usually a high degree of uncertainty exists regarding realizability
of future benefits.
c. Limited-life intangible assets are amortized over their useful lives
and reported net of the accumulated amortization.
d. Indefinite-life intangible assets, such as goodwill, are not
amortized but are assessed periodically for impairment.
e. Expenditures for intangible assets such as most R & D and
internally-developed goodwill are not capitalized but are expensed
as incurred.
4. Other assetsa special classification for unusual items that cannot

be included in one of the other asset categories.
a. Examples include long-term prepaid expenses, non-current
receivables, and prepaid pension cost.
b. Some items included in this category should be classified
elsewhere.
5. Current assets.
Manual
TEACHING TIP
Illustration 5-2 can be used in discussing the relationship among current
assets, current liabilities, working capital and the operating cycle.
a. Definition: Resources which are expected to be turned into cash,

sold, or consumed within a year or the operating cycle, whichever
is longer. (Point out the distinction between the operating cycle
and the accounting cycle.)
b. Point out some conceptual weaknesses in the classification of
current assets:
(1) Prepaid expenses will neither be turned into cash nor used to
pay a current liability. Discuss the justification for including
them in current assets.
(2) Consumption of fixed assets during the current period:
conceptually, the current depreciation and amortization
charges should be classified as current assets, analogous to
the currently maturing portion of long-term debt.
c. Items included in the current asset section include:
(1) Inventoriesthe basis of valuation (e.g., cost or the lower of
cost or not realizable value), cost flow assumption (e.g., FIFO or
average cost), and stage of completion of manufactured
inventories should be disclosed.
(2) Receivablesthe amounts of expected uncollectibles,

nontrade receivables, and accounts pledged or discounted
must be disclosed.
(3) Prepaid expensesexpenses prepaid beyond the current

operating cycle are reported in the other asset section.
(4) Short-term investmentsinvestments in debt securities are

classified as either trading, available-for-sale, or held-to-
maturity, while investments in equity securities are classified
as either trading or available-for-sale. Trading and available-
for-sale securities are reported at fair value, while held-to-
maturity securities are reported at amortized cost.
(5) Cashany cash restricted for purposes other than current

obligations is excluded from current assets. Cash equivalents
are short-term highly liquid instruments that mature within
three months or less.
6. Equitydifficult to prepare and understand. Divided into six parts.
a. Share capital. The par or stated value of shares issued. It includes
ordinary shares and preference shares.
b. Share premium. The excess of amounts paid-in over the par or

stated value.
c. Retained earnings. The corporations undistributed earnings. It

may be divided between the unappropriated and restricted
amounts.
d. Accumulated other comprehensive income. Also referred to as

reserves or other reserves, includes such items as unrealized
gains and losses on available-for-sale securities and unrealized
gains and losses on certain derivative transactions.
e. Treasury shares. The amount of share capital repurchased.
f. Non-controlling interest (Minority interest). A portion of the equity of

subsidiaries not owned by the reporting company.
7. Non-current liabilities.
a. Definition: Obligations that are reasonably expected to be

liquidated at some date beyond one year or one operating cycle.
b. Three types:
(1) Obligations arising from specific financing situations where

additional assets are acquired: issuance of bonds, long-term
lease obligations, long-term notes payable.
(2) Obligations arising from ordinary operations of the company

such as pension obligations and deferred income tax
liabilities.
(3) Obligations that depend on the occurrence or non-occurrence

of one or more future events to confirm the amount payable, or
the payee, or the date payable (e.g., service or product
warranties).
c. Any premium or discount on bonds payable is disclosed separately

as an addition to or subtraction from the bonds.
d. The currently maturing portion of long-term debt is classified as a

current liability. Theoretically any related premium or discount
should also be reclassified as current.
Manual
e. Supplementary information that is usually disclosed in separate
schedules includes the existence of debt covenants and
restrictions and the terms of the debt such as maturity dates,
interest rates, and amounts of any securities pledged to support
the debt.
8. Current liabilities.
a. Definition: Obligations that are reasonably expected to be

liquidated through the use of current assets or the creation of
other current liabilities within one year or operating cycle,
whichever is longer.
b. Examples:
(1) Payables resulting from the acquisition of goods and services:

accounts payable, wages payable, taxes payable.
(2) Collections received in advance for the delivery of goods or

performance of services: unearned rent revenue, unearned
subscriptions revenue.
(3) Other liabilities whose liquidation will take place within the
operating cycle: bonds to be paid in the current period, short-
term obligations arising from purchase of equipment.
c. Generally notes payable, accounts payable, or short-term debt are

listed first and income taxes payable or other current liabilities
are listed last.
d. Some liabilities that will be paid within a year are reported as long-
term liabilities. These include:
(1) short-term debt expected to be refinanced.
(2) debt that will be retired out of noncurrent assets

(alternatively, both the debt and the assets could be classified
as current).
e. Working capital is a measure of a firms ability to meet its

currently maturing obligations.
Working capital = Current assets minus current liabilities.
E. (L.O. 3)Statement of financial position format.
1. Account form.
2. Report form.
F. Statement of Cash Flows.
TEACHING TIP
Use Illustrations 5-3 and 5-4 to give an overview of the purpose and
composition of the statement of cash flows.
1. (L.O. 4)Purpose of the statement.
a. To provide information about the cash receipts and cash

payments of an entity during a period.
b. To achieve this, the statement reports on the operating, investing,

and financing activities of the business.
2. The statement is useful because it provides answers to the following
important questions:
a. Where did cash come from?
b. What was cash used for?
c. What was the change in the cash balance?
3. (L.O. 5 and 6)Classification of cash flows.
a. Operating activities.The cash flows connected with the

determination of net income.
b. Investing activities.The cash flows connected with purchasing

and selling investments and property, plant, and equipment and
making and collecting loans.
c. Financing activities.The cash flows connected with borrowing

and repaying amounts borrowed, selling stock, and paying cash
dividends.
4. Significant noncash transactions.
a. All significant financing and investing activities must be disclosed

in the statement or notes, even though cash is not affected.
b. Examples of transactions that must be disclosed:
(1) conversion of bonds to common stock.
Manual
(2) acquisition of property through issuance of stock or through
exchange for other property.
5. Investing activities and financing activities.
Investing Activities Financing Activities

Sale of property, plant, and equipment Issuance of equity
securities
Sale of investments in other entities Issuance of debt
Collection of loans to other entities
Purchase of property, plant and equipment Payment of dividends
Purchase of investments in other entities Redemption of debt
Loans to other entities Reacquisition of share capital
6. Chapter 23 discusses preparation of the statement of cash flows in

detail.
G. (L.O. 7)Usefulness of the statement of cash flows:
1. Information on the statement is used to evaluate financial liquidity,

and financial flexibility.
2. Analysis of net cash provided by operating activities includes:
a. Current cash debt coverage:used to determine if a company can

pay off its current liabilities from its operating activities.
b. Cash debt coverage:used to determine if a company can repay all
of its liabilities from its operating activities.
c. Free cash flow:used to determine the discretionary cash flow a

company has for additional investments, debt retirement, treasury
stock, or adding to its liquidity.
TEACHING TIP
Illustration 5-5 provides the formulas for analyzing net cash provided by
operating activities.
H. (L.O. 8)Notes to the financial statements.
1. Summary of Significant Accounting Policies
2. Disaggregated information about:
(a) Property, plant, and equipment, with related accumulated

depreciation.
(b) Receivables.
(c) Inventories
(d) Provisions.
(e) Equity capital and reserves.
I. (L.O. 9)Techniques of Disclosure.
1. Parenthetical explanations (example: net of tax calculations in

Chapter 4).
2. Notes (example: accounting policies and contingencies).
3. Cross-reference and contra items (example: bond discounts).
4. Other guidelines.
a. Offsetting
b. Consistency
c. Fair presentation
Manual
J. (L.O. 10)APPENDIX 5-A.Ratio Analysis.
1. Used to express the relationships between selected financial

statement data.
2. Can be classified as:
a. Liquidity ratios:measure the short-run ability to pay maturing

obligations.
b. Activity ratios:measure the effectiveness of asset usage.
c. Profitability ratios:measure the success or failure of a firm.
d. Coverage ratios:measure the degree of protection for long-term

creditors and investors.
TEACHING TIP
Use Illustration 5-6 to discuss the specific ratios included in each
classification.
K. APPENDIX 5-B.Specimen financial statements.
TEACHING TIP
Use Illustrations 5-7 and 5-8 to review the financial statements of the
Marks and Spencer Group.
ILLUSTRATION 5-1
BALANCE SHEET CLASSIFICATIONS
Manual
ILLUSTRATION 5-2
CURRENT ASSET CLASSIFICATION
ILLUSTRATION 5-3
STATEMENT OF CASH FLOWS
Manual
ILLUSTRATION 5-4
STATEMENT OF CASH FLOWS (INDIRECT METHOD)
ILLUSTRATION 5-5
FORMULAS FOR ANALYZING NET CASH PROVIDED
BY OPERATING ACTIVITIES
Manual
ILLUSTRATION 5-6
RATIOS
Manual
ILLUSTRATION 5-7
QUESTIONS COVERING THE FINANCIAL STATEMENTS
OF THE MARKS AND SPENCER GROUP
Manual
ILLUSTRATION 5-8
ANSWERS TO QUESTIONS ABOUT THE FINANCIAL
STATEMENTS OF THE MARKS AND SPENCER GROUP
ILLUSTRATION 5-8 (continued)
Manual

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CHAPTER 5

Statement of Financial Position and

ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)

2. Classification of 11, 12, 13, 1, 2, 3, 4, 1, 2, 3, 8, 1, 2, 3

5. Convergence. 31, 32, 33

1. Explain the uses and limitations of a 7

2. Identify the major classifications of 1, 2, 3,

3. Prepare a classified statement of 1, 2, 3, 4, 5, 1, 2, 3, 4, 5, 1, 2, 3, 4,

4. Indicate the purpose of the statement

5. Identify the content of the statement 13

7. Understand the usefulness of the 16 15, 16, 18 6, 7

8. Determine additional information

9. Describe the major disclosure

P5-1 Preparation of a classified statement of

CA5-1 Reporting the financial effects of varied Moderate 2025

1. Explain the uses and limitations of a statement of financial position.

*Note:All asterisked (*) items relate to material contained in the Appendix

1. Chapter 5 presents a detailed discussion of the concepts and

Statement of Financial Position

2. (L.O. 1)For many years financial statement users generally considered

3. Criticism of the statement of financial position has revolved around the

4. The problem with current value information concerns the reliability of

Assets.Probable future economic benefits obtained or controlled by a

Liabilities.Probable future sacrifices of economic benefits arising from

Equity.Residual interest in the assets of an entity that remains after

6. Items classified as long-term investments (or simply investments) in the

a. Investments in securities, such as ordinary shares, bonds, or long-

b. Investments in tangible assets not currently used in operations.

c. Investments set aside in special funds (sinking, pension, plant

d. Investments in nonconsolidated subsidiaries or associated

7. Companies group investments in debt and equity securities into three

a. Held-for-collection. Debt securities that a company has a positive

b. Trading. Also referred to as fair value through profit or loss securities.

c. Non-trading equity. Equity securities not classified as held-to-

9. Intangible assets lack physical substance; however, their benefit lies in

11. Many companies include an Other Assets classification in the

a. Inventories. Are reported at the lower-of-cost-or-net-realizable value

b. Receivables. Are reported at their net realizable value. Major

c. Prepaid Expenses. Are reported at their cost.

d. Short-term Investments. Includes trading securities and held-for-

e. Cash and Cash Equivalents. Cash includes currency and demand

a. Share capital. The par or stated value of shares issued. It includes

c. Retained earnings. The corporations undistributed earnings. It may be

d. Accumulated other comprehensive income. Also referred to as

e. Treasury shares. The amount of share capital repurchased.

f. Non-controlling interest (Minority interest). A portion of the equity of

14. Non-current liabilities are obligations whose settlement date extends

a. Obligations arising from specific financing situations, such as the

b. Obligations arising from the ordinary operations of the company such

c. Obligations that depend on the occurrence or non-occurrence of one

Statement of Cash Flows

18. (L.O. 4)The primary purpose of a statement of cash flows is to provide

a. Operating activities involve the cash effects of transactions that enter

b. Investing activities include making and collecting loans and

c. Financing activities involve liability and owners equity items and

The basic format of the statement of cash flows is shown below.

Statement of Cash Flows

Cash flows from operating activities... $XXX

a. Determine the cash provided by or used in operations.

b. Determine the cash provided by or used in investing and financing

c. Determine the change (increase or decrease) in cash during the

The information included in this chapter on the preparation of the

a. How successful is the company in generating net cash provided by

Note:All asterisked () items relate to material contained in the Appendix