MARY JOY DUQUE

ACMA 181

SELF-TEST QUESTIONS

1. Do you agree that the statement of financial position does not portray the market value of the
entity? Explain your answer.
• I agree that the statement of financial position (SFP) does not portray the market value of the
entity. Most asset are not reported at fair value, but instead is measured according to historical
cost. Also, there are some resources that are nor recorded as assets at all. Therefore, the assets
of a company minus liabilities, as shown in the SFP will not represent the company’s market
value.

2. What are the elements of an entity’s financial position? Describe each briefly.
• Assets
- It is something that the entity owns or control in order to derive economic benefits
from its use. Assets can be classified as current and non-current depending on its
duration. Assets that will deliver its economic benefits to the entity over a long term
period is classified as non-current while those assets realized within a year are
classified as current assets.

• Liabilities

- An obligation that a business owes to a creditor and its settlement involves transfer
of cash or other resources.

• Shareholders Equity

- Equity is what the business owes to its owners. Equity is derived by deducting total
liabilities to its total assets. The answer represents as the residual interest in the
business that belongs to the owner.

3. How does the concept of operating cycle affect the classification of certain assets and
liabilities into current and non-current?

•The time required for a company’s cash to be put into its operations and then return to the
company’s cash account. The operating cycle has importance in classifying current
assets and current liabilities. While most manufacturers have operating cycles of several
months, a few industries require very long processing times. This could result in an operating
cycle that is longer than one year. To accommodate those industries, the accountants'
definitions of current assets and current liabilities include the following phrase:...within one year
or within the operating cycle, whichever is longer.
4. Explain how debt refinancing can affect the classification of a liability.

• If the debt is due within 12 months from the reporting date, it is classified as a current liability
even if a long-term financing has been completed before the financial statements are released.
The only exception is if, at the statement of financial position date, the entity expects to
refinance it or roll it over under an existing agreement for at least 12 months and the decision is
solely at its discretion.

5. Describe the major components of shareholder’s equity

•Equity is the owner’s residual claims to the assets of the entity. Shareholders equity consists of
major components: contributed capital is primarily the owner’s investment in the company,
accumulated other comprehensive income is an additional comprehensive income, and retained
earnings represents the net earnings accumulated over time that have not been distributed as
dividends.

6. Compare the different forms of presenting the statement of financial position.

•A company’s statement of financial position can be presented in one of two ways, account
form and report form, depending on the preference of those who will review the document.

- Account Form
o Presented in a horizontal format, with information in two columns beside
each other. The left column in the list consists of assets, while the right
columns consists of liabilities and shareholder’s equity.
- Report Form
o Presented in a vertical format, and is essentially one column that spans an
entire page. Starting from the top provides the a total value of assets
following the total liabilities and shareholder’s equity, with the final double
line of the report form to be the total combined values.
LEARNING ACTIVITY

Classify the following items. Use the letter of the following classifications:
A Current Assets D Non-current liability

B Non-current assets E Equity

C Current liabilities F Notes to Financial Statements

1. Work in process inventory 6. Revaluation surplus

2. Cash dividends payable 7. Deferred tax asset

3. Investment in associates 8. Ordinary share capital

4. Prepaid rent 9. Note payable to bank due in 5 years

5. Loss on pending lawsuit of P1M; 10. Retired equipment classified as held loss is
reasonable possible to occur for sale

ANSWERS:

1. A.
2. C
3. B
4. A
5. F
6. E
7. B
8. E
9. D
10. F.