Accounting Concepts and Asset Classification
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Questions and Answers

An entity's operating cycle is defined as the time between the acquisition of assets for processing and their conversion into cash or cash equivalents.

True (A)

According to PAS 1, an asset can be classified as current if it is expected to be realized within four months after the reporting period.

False (B)

Cash and cash equivalents are considered noncurrent assets.

False (B)

Current assets are typically listed in order of liquidity.

<p>True (A)</p> Signup and view all the answers

All assets not classified as current are automatically categorized as noncurrent assets according to PAS 1.

<p>True (A)</p> Signup and view all the answers

The functional presentation classifies expenses based on their nature.

<p>False (B)</p> Signup and view all the answers

Cost of sales is a method used in the functional presentation of expenses.

<p>True (A)</p> Signup and view all the answers

Under the nature of expense method, expenses are aggregated according to their function.

<p>False (B)</p> Signup and view all the answers

Distribution cost is combined with administrative expenses in the nature of expense method.

<p>True (A)</p> Signup and view all the answers

Comprehensive income consists only of components of profit and loss.

<p>False (B)</p> Signup and view all the answers

Net income and net loss are terms that can be used interchangeably with profit and loss.

<p>True (A)</p> Signup and view all the answers

Other comprehensive income (OCI) is recognized in profit or loss.

<p>False (B)</p> Signup and view all the answers

Changes in revaluation surplus are a component of other comprehensive income.

<p>True (A)</p> Signup and view all the answers

Unrealized gains or losses on investments in equity instruments are classified as OCI that will be reclassified subsequently to profit or loss.

<p>False (B)</p> Signup and view all the answers

The Amended PAS 1 requires that OCI line items be presented without any classification.

<p>False (B)</p> Signup and view all the answers

Gains or losses from translating financial statements of a foreign operation are classified as OCI that will NOT be reclassified subsequently to profit or loss.

<p>False (B)</p> Signup and view all the answers

Actuarial gains or losses on defined benefit plans are fully recognized through other comprehensive income.

<p>True (A)</p> Signup and view all the answers

The debt ratio is calculated by dividing total assets by total liabilities.

<p>False (B)</p> Signup and view all the answers

The equity ratio measures the proportion of total liabilities financed by owners' equity.

<p>True (A)</p> Signup and view all the answers

The receivable turnover ratio assesses a company's efficiency in managing its inventory.

<p>False (B)</p> Signup and view all the answers

The gross profit margin measures the percentage of profit generated before deducting expenses.

<p>True (A)</p> Signup and view all the answers

The debt to equity ratio indicates a company's reliance on equity funding compared to creditor funding.

<p>False (B)</p> Signup and view all the answers

Net profit margin calculates the percentage of profit after deducting all expenses from net sales.

<p>True (A)</p> Signup and view all the answers

A higher inventory turnover ratio generally indicates poor management of inventory.

<p>False (B)</p> Signup and view all the answers

Return on equity measures the profitability of a company relative to shareholders' equity.

<p>True (A)</p> Signup and view all the answers

Total Current Assets are $2,350,000.

<p>True (A)</p> Signup and view all the answers

The total Noncurrent Liabilities amount to $2,500,000.

<p>True (A)</p> Signup and view all the answers

The Cash and Cash Equivalent amount includes a Petty Cash Fund of $20,000.

<p>False (B)</p> Signup and view all the answers

Total Assets equal $15,550,000 in the financial statement.

<p>True (A)</p> Signup and view all the answers

The amount for Share Capital is listed as P100 par at $5,000,000.

<p>True (A)</p> Signup and view all the answers

Inventories total $1,000,000 in the statement.

<p>False (B)</p> Signup and view all the answers

Deferred Tax Liability is categorized under Current Liabilities.

<p>False (B)</p> Signup and view all the answers

Retained Earnings amount to $3,650,000.

<p>True (A)</p> Signup and view all the answers

The total for Current Liabilities is $1,700,000.

<p>False (B)</p> Signup and view all the answers

Total Noncurrent Assets are reported as $12,200,000.

<p>False (B)</p> Signup and view all the answers

Shareholders' Equity totals $11,650,000.

<p>True (A)</p> Signup and view all the answers

Total Trade and Other Receivables equal $800,000.

<p>False (B)</p> Signup and view all the answers

Cash in bank is reported as $300,000 within Cash and Cash Equivalents.

<p>True (A)</p> Signup and view all the answers

Accounts Payable is part of Noncurrent Liabilities.

<p>False (B)</p> Signup and view all the answers

The company holds Intangible Assets valued at $1,000,000.

<p>False (B)</p> Signup and view all the answers

The total assets of Equal Company amounted to $2,121,000.

<p>True (A)</p> Signup and view all the answers

The current ratio for Equal Company is approximately 2.5:1.

<p>False (B)</p> Signup and view all the answers

Equal Company's net income for the year ended December 31, 2016 was $44,000.

<p>True (A)</p> Signup and view all the answers

Long-term investments are classified under current assets in the statement of financial position.

<p>False (B)</p> Signup and view all the answers

The cost of goods sold for Equal Company during the year was $60,000.

<p>True (A)</p> Signup and view all the answers

Accounts Payable represents a non-current liability in Equal Company's financial position.

<p>False (B)</p> Signup and view all the answers

Total non-current assets for Equal Company are $1,746,000.

<p>True (A)</p> Signup and view all the answers

Total current liabilities for Equal Company are listed as $190,000.

<p>False (B)</p> Signup and view all the answers

Flashcards

Operating Cycle

The time between acquiring assets for processing and converting them into cash.

Current Asset Classification

An asset expected to be realized or sold/consumed within a company's normal operating cycle or within 12 months.

Noncurrent Asset

Any asset not classified as current; the remaining assets after classifying current assets.

Examples of Current Assets

Cash, cash equivalents, trading securities, receivables, inventories, and prepaid expenses.

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Default Operating Cycle Duration

If a company's operating cycle isn't clear, it's assumed to be 12 months.

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Functional Presentation

Classifies expenses by their function within the business (e.g., cost of sales, distribution, administration).

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Cost of Sales Method

Another name for the Functional Presentation of an income statement, where expenses are categorized by their function.

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Natural Presentation

Classifies expenses by their nature (e.g., salaries, rent, depreciation) instead of their function.

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Nature of Expense Method

Another name for the Natural Presentation of an income statement, where expenses are grouped by their nature.

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Difference: Functional vs. Natural

Functional groups expenses by their role in the business (cost of sales, distribution, etc.), while Natural groups them by their type (salaries, rent, etc.).

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What is Comprehensive Income?

Comprehensive income is the total change in equity of a company during a reporting period from transactions and other events and circumstances, except for those that result from investments by owners and distributions to owners.

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What are the components of Comprehensive Income?

Comprehensive income consists of two main parts: 1. Profit or Loss (the traditional bottom line in an income statement) and 2. Other Comprehensive Income (OCI).

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What is Profit or Loss?

Profit or Loss is the result of subtracting expenses from income, excluding any items classified as Other Comprehensive Income (OCI).

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What is Other Comprehensive Income (OCI)?

Other Comprehensive Income (OCI) includes items that are not recognized on the traditional income statement but still affect a company's equity.

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What are examples of OCI items?

Examples of OCI include unrealized gains or losses on investments, translation adjustments for foreign subsidiaries, and certain changes in pension plan valuations.

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How is OCI presented?

OCI is presented separately from profit or loss in the statement of comprehensive income, with items classified based on whether they will be reclassified to profit or loss in the future.

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When is OCI reclassified to Profit or Loss?

OCI items are reclassified to profit or loss when certain specific conditions are met, such as the sale of an investment or the realization of a foreign exchange gain or loss.

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Examples of OCI items that are reclassified to Profit or Loss?

Examples of OCI items that are reclassified to profit or loss include gains or losses from translating financial statements of foreign operations and unrealized gains or losses on derivative contracts designated as cash flow hedges.

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Statement of Financial Position

A financial statement that shows a company's assets, liabilities, and equity at a specific point in time. It provides a snapshot of the company's financial health.

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Assets

Resources controlled by a company that are expected to provide future economic benefits.

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Liabilities

Obligations of a company to pay money or other assets to another party.

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Equity

The residual interest in the assets of a company after deducting all liabilities. It represents the owners' stake in the business.

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Current Assets

Assets that are expected to be converted into cash or used up within one year of the balance sheet date.

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Cash and Cash Equivalents

Highly liquid assets that can be readily converted to cash.

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Property, Plant, and Equipment (PP&E)

Physical assets used in a company's operations, such as land, buildings, machinery, and equipment.

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Intangible Assets

Assets that have no physical form but have value, such as patents, copyrights, and trademarks.

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Current Liabilities

Liabilities that are expected to be paid within one year of the balance sheet date.

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Noncurrent Liabilities

Liabilities that are not expected to be paid within one year of the balance sheet date.

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Share Capital

The amount of money that shareholders have invested in the company. It represents the total value of shares issued.

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Retained Earnings

The portion of a company's profits that has not been distributed to shareholders as dividends.

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Allowance for Doubtful Accounts

An estimate of the amount of receivables that are likely to be uncollectible.

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Deferred Tax Liability

A liability that arises when a company pays less tax in a period than the tax that is actually due on its taxable income.

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Debt Ratio

The percentage of a company's assets financed by debt (liabilities). It shows how much debt a company uses to fund its operations.

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Equity Ratio

The percentage of a company's assets funded by equity (owner's investments). It reflects the proportion of assets financed by shareholders.

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Debt to Equity Ratio

Compares a company's total debt to its total equity. This ratio indicates the company's reliance on debt vs. equity financing.

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Receivable Turnover

Indicates how efficiently a company collects its receivables (money owed by customers). A higher turnover indicates faster collection.

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Inventory Turnover

Measures how efficiently a company manages its inventory. A higher turnover suggests faster inventory sales and less inventory holding costs.

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Gross Profit Margin

Percentage of profit a company makes after subtracting the cost of goods sold from sales revenue. Shows how well a company controls its production costs.

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Net Profit Margin

Percentage of profit a company retains after all expenses are deducted from revenue. Shows overall business profitability.

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Return on Equity (ROE)

Measures how efficiently a company uses its shareholders' investment to generate profit. Higher ROE indicates better profitability.

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Horizontal Analysis

Comparing financial data over time to identify trends and changes. Helps assess performance and make informed decisions.

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Vertical Analysis

Examining each item on a financial statement as a percentage of a base figure, revealing the relative importance of each element.

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What does a Current Ratio of 3.57:1 mean?

For every 1 peso of current liabilities, the company has 3.57 pesos of current assets to cover them. A higher ratio indicates better liquidity.

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Accounts Receivable, Net

The money owed to a company by its customers, minus any estimated uncollectible amounts.

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Inventory

The goods a company has for sale, either finished or in the process of being produced.

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Short-term Investments

Investments held for less than a year, easily convertible to cash.

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Land

The property owned by the company, not including buildings or structures.

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Long-term Debts

Financial obligations due over a year or more, like loans and mortgages.

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Study Notes

Fundamentals of Accountancy, Business and Management 2

  • This course covers the fundamentals of accountancy, business, and management.
  • The course was created in 2016 for senior high school students in Malvar, Batangas.
  • The course is part of the STEM (Science, Technology, Engineering, and Mathematics) program.

Content Standard

  • Students demonstrate understanding of account titles under assets, liabilities, and capital accounts in the Statement of Financial Position (SFP).
  • Key account titles include cash, receivables, inventories, prepaid expenses, property, plant, and equipment, payables, accrued expenses, unearned income, long-term liabilities, and capital.
  • This knowledge prepares students to create SFPs using the Statement of Comprehensive Income (SCI).

Performance Standards

  • Students can solve exercises to prepare an SFP for a single proprietorship.
  • Proper classification of accounts (current and noncurrent) is required using the report form.

Essential Learning Competencies

  • Students identify and describe the elements of the SFP.
  • Students prepare an SFP using report and account forms, classifying items as current or noncurrent.

Accounting Cycle

  • The accounting cycle includes steps like analyzing transactions, preparing journal entries, posting entries, preparing an unadjusted trial balance, adjusting entries, preparing an adjusted trial balance, preparing financial statements, and creating reversing entries (if necessary).

Financial Statements

  • Financial statements communicate financial information periodically to users.
  • They represent the financial position and performance of an entity.
  • The objective of financial statements is to provide useful information on financial position, financial performance, and cash flows for economic decision-making.

Elements of Financial Statements

  • The financial statements detail assets, liabilities, equity, income, expenses (including gains and losses), contributions to owners, and distributions to owners.
  • Cash flows are also included.

Frequency of Reporting

  • Financial statements are presented at least annually.
  • Entities must disclose the period covered in statements differing from annual periods.
  • For periods longer or shorter than a year, the reason for the variation and lack of comparability should be made clear.

Components of Financial Statements

  • Key components include the Statement of Financial Position, Statement of Comprehensive Income, Statement of Changes in Equity, and Notes to the Financial Statements.

Statement of Financial Position (Balance Sheet)

  • The balance sheet shows an entity’s assets, liabilities, and owner's equity.
  • Assets are classified into current and noncurrent.

Assets

  • Assets are resources controlled by an entity as a result of past transactions or events from which future economic benefits are expected to flow to the entity.
  • Assets are categorized as current or noncurrent.
  • Current assets are expected to be converted to cash, sold, or consumed within the entity's normal operating cycle. Examples include cash, accounts receivable, and inventory.
  • Noncurrent assets are not expected to be converted to cash, sold, or consumed within the entity's normal operating cycle. Examples include property, plant, and equipment, and long-term investments.

Liabilities

  • Liabilities are present obligations of an entity arising from past transactions or events, the settlement of which is expected to result in an outflow of resources embodying economic benefits.
  • Liabilities can be categorized as current or noncurrent.
  • Current liabilities are obligations expected to be settled within the entity's operating cycle.
  • Noncurrent liabilities are obligations expected to be settled after the operating cycle.

Owner's Equity

  • Owner's equity is the residual interest in the assets of an entity after deducting all its liabilities.
  • It represents the owners' stake in the business.

Single Step Approach and Multi-step Approach for Statement of Comprehensive Income (SCI)

  • Students prepare SCI for a service and merchandising business using the single-step and multi-step approaches.
  • The single-step approach groups all revenues and expenses together to arrive at net income.
  • In a multi-step approach, various income and expenses are categorized into sections and then added and subtracted.

Statement of Comprehensive Income (SCI)

  • The SCI measures the changes in equity (or net assets) during a period arising from all transactions and other events other than those resulting from transactions with owners.
  • It encompasses items of income and expenses, including profit or loss from operations as well as (discretionary) reclassification adjustments.
  • The profit or loss section (typically the "bottom line") is calculated before considering the components of other comprehensive income.
  • The SCI may present separate components of other comprehensive (non-profit-or-loss-affecting) transactions (e.g. foreign currency exchange, etc) and reclassification adjustments.
  • Includes a final line representing the total comprehensive income for the period.

Financial Ratio Analysis

  • Financial ratios use relationships between accounts to analyze and interpret a company's financial position and performance.
  • Liquidity ratio: measures the capacity of a company to meet its short-term obligations. Examples include current ratio, quick ratio, and working capital.
  • Solvency ratio: indicates the extent to which a company's assets can cover its liabilities. Examples include debt/assets ratio, debt-to-equity ratio, debt/capital, and equity ratio.
  • Profitability ratios measure profitability of operations, and include gross profit margin, net profit margin, and return on equity.
  • Efficiency (management) ratios reflect how effectively a company uses its resources (assets) examples include accounts receivable turnover and inventory turnover.

Methods of Financial Statement Analysis

  • Horizontal analysis compares financial information over different periods.
  • Vertical analysis expresses each item as a percentage of a specific total (e.g. representing net sales figure).

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Fundamentals of Accountancy, Business and Management 2 Past Paper PDF

Description

This quiz covers key concepts in accounting, including the operating cycle, asset classification according to PAS 1, and the functional presentation of expenses. Test your understanding of current and noncurrent assets, as well as income reporting for businesses.

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