Financial Statements Analysis Fall term Academic Year 2022-2023

Tutorial 1

Introduction to Financial Statements and Other Financial Reporting Topics

Questions

1 A company prepares financial statements in order to summarize financial information. Below are a
list of financial statements and a list of descriptions.

Financial statements:

a. Balance sheet
b. Income statement
c. Statement of cash flows
d. Statement of stockholders’ equity

Descriptions:

1. Details the sources and uses of cash during a specified period of time.
2. Summary of revenues and expenses and gains and losses during a specified period of time.
3. Shows the financial condition of an accounting entity as of a specific date.
4. Presents reconciliation of the beginning and ending balances of stockholders’ equity
accounts.

Required: Match each financial statement with its description.

Balance sheet (a)→3

Income statement (b) →2

Statement of cash flows (c) →1

Statement of stockholders’ equity (d) →4

2Which two principal financial statements explain the difference between two balance sheet dates?
Describe how these financial statements explain the difference between two balance sheet dates.

The income statement describes income between two balance sheet dates. The net income of the
period is closed to the retained earnings on balance sheet.

The cash flow statement explains the change in cash and cash equivalents between two balance
sheet dates. The total cash flow=Operating cash flow+ Investing cash flow+ Financing cash flow

3 Why are notes to financial statements necessary?

In respect of the full disclosure principle, notes are integral part of financial statements. They explain
information disclosed on the face of the other financial statements and provide additional
information about the set of GAAP followed by the organization, its significant accounting policies
(inventory valuation, depreciation methods, fair value measurement and historical cost…),
contingent liabilities, subsequent events…

4 What are the roles of management and the auditor in the preparation and integrity of the financial
statements?

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 Financial Statements Analysis Fall term Academic Year 2022-2023

Management is responsible for the preparation and integrity of financial statements. Auditors are
professionals who provide an assurance service: express a professional opinion about the fairness,
consistency and conformity with GAAP of financial statements.

5 An auditor’s report is the formal presentation of all the effort that goes into an audit. Below is a list
of classifications of audit opinions that can be found in an auditor report as well as a list of phrases
describing the opinions.

Classifications of audit opinions:

a. Unqualified opinion
b. Qualified opinion
c. Adverse opinion
d. Disclaimer opinion

Phrases:

1. This opinion states that the financial statements do not present fairly the financial position,
results of operations and cash flows of the entity, in conformity with generally accepted
accounting principles.
2. This type of report is rendered when the auditor has not performed an audit sufficient in
scope to form an opinion.
3. This opinion states that except for the matters to which the qualification relates, the financial
statements present fairly, in all material respects, the financial position, results of operations
and cash flows of the entity, in conformity with generally accepted accounting principles.
4. This opinion states that the financial statements present fairly, in all material respects, the
financial position, results of operations and cash flows of the entity, in conformity with
generally accepted accounting principles.

Required: Match each type of audit opinion with its description.

Unqualified opinion (a)→4

Qualified opinion (b) →3

Adverse opinion (c) →1

Disclaimer opinion (d) →2

6 Why do some unqualified opinions have explanatory paragraphs?

Auditors may need to include explanatory paragraphs in the unqualified opinion audit report to draw
the attention of users of financial statements to considerations they should be aware of. The
explanatory paragraph is not a qualification. Users of financial statements should appreciate the
materiality of the matters included in the explanatory paragraph within their decision-making
process. Example: material uncertainty affects management’s estimates.

7 What are contingent liabilities?

Contingent liabilities are liabilities which are uncertain in timing of their occurrence and their
amount. The outcome of a contingent liability depends on a future event which may or may not
occur.

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 Financial Statements Analysis Fall term Academic Year 2022-2023

An estimated loss from a contingent liability should be charged to income and be established as a
liability only if the loss is probable and the amount is reasonably determinable. This recorded
contingent liability should also be described in a note.

A loss contingency that is reasonably possible but not probable must be disclosed in notes even if the
amount of the loss is not reasonably estimable.

Examples: lawsuits against the firm, signing as a guarantor on a loan…

8 Classify the following as adjusting or non-adjusting subsequent events:

a. Settlement of a lawsuit that was in progress at the balance sheet date

Adjusting event (The loss amount already estimated on the balance sheet date should be
adjusted in the light of the new information available to management)
b. A doubtful customer goes bankrupt: Adjusting event (the amount of the allowance for
doubtful accounts should be increased)
c. Inventory destruction in fire: Non-adjusting event but note disclosure
d. Death of a board member: Non-adjusting event but note disclosure

9 Consolidated statements may be issued to show financial position as it would appear if two or
more companies were one entity. What is the objective of these statements?

Consolidation reflects an economic rather than a legal concept of the entity. The parent and the
subsidiary are two distinct legal entities but they represent one economic whole.

10 What is the basic guideline for consolidation?

Financial statements of the parent and the subsidiary are consolidated for all majority-owned
subsidiaries unless control is temporary or doesn’t rest with the majority owner. Note that control
must be effective and not necessarily legal.

IFRS 10: Elements of control

Power over the investee Exposure to variable returns from Ability to use the power over the
(power arises from rights) the involvement with the investee investee to influence the returns

Control

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 Financial Statements Analysis Fall term Academic Year 2022-2023

Problems

1 Elizabeth Company engaged in the following transactions during the month of September:

Sept. 1 Billed customers for $12 000.

8 Purchased supplies on account for $800.
12 Paid cash a rent expense of $1 000 and a refundable deposit of $2 000.
15 Received cash for $1 000 from a customer who was previously billed.
20 Purchased equipment for $6 000 in cash.
24 Paid in cash merchandises of $10 000 previously purchased on account.
Required:

a. Journalize the transactions.

b. Determine the ending balance of the cash account on September 30 using the T-account,
knowing that the beginning balance on September 1 is $30 000.

Accounts receivable 12 000

Sales revenue 12 000
Supplies 800
Accounts payable 800
Rent expense 1 000
Deposits (assets) 2000
Cash 3 000
Cash 1 000
Accounts receivable 1 000
Equipment 6 000
Cash 6 000
Accounts payable 10 000
Cash 10 000

Cash
Sept. 1 30 000 Sept. 12 3 000
Sept.15 1 000
Sept. 20 6 000
Sept.31 12 000 Sept. 24 10 000
Debit
Ending
balance

2 Required: Journalize the necessary adjusting entries at December 31 corresponding to the

following adjusting entry situations of Cook Company:

a. On July 1, Cook Company paid $18 000 for a two-year advertising contract. The contract
stands for the period July 1 through June 30 (2 years). This is the first year of the contract.
The transaction was recorded as advertising expense and a decrease in cash.
b. On December 1, Cook Company paid $4 000 for a two-month rent (December and January).
The transaction was recorded as prepaid rent and a reduction in cash.

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c. On September 5, Cook Company purchased $400 of supplies for cash. The purchase was
recorded as supplies. On December 31, it was determined that various supplies had been
consumed in operations and that supplies costing $100 remained on hand.
d. On December 10, Cook Company recorded sales revenue of $2 000. On December 31, the
related goods were not delivered to the customer.
e. Cook Company purchased an office equipment at $8 000 on July 1, N-1. The equipment has
an estimated life of 2 years, with no salvage value.
f. On March 1, Cook borrowed $100 000 from a bank at an annual interest rate of 6 %. The first
year’s interest payment amounts to $6 000 and is due on March 1, N+1.

Prepaid expense 13 500

Advertising expense 13 500
18000x18/24
Rent expense 2 000
Prepaid rent 2 000
Supplies expense 300
Supplies 3 00
Sales revenue 2 000
Unearned revenue 2 0 00
Depreciation expense 4 000
Accumulated depreciation 4 000
(8000-0)/2=4000
Interest expense 4 000
Interest payable 4 000
6000x10/12=

3 Darlene Cook Company engaged in the following transactions during the month of July:

July1 Acquired land for $10 000. The company paid cash.
8 Billed customers for$3 000.
12 Incurred a repair expense for repairs of $600.
15 Received a check for$500 from a customer who was previously billed.
20 Paid $300 for supplies. This was previously established as a liability (accounts payable).
24 Paid wages in the amount of$400. This was for the work performed during July.
Required: Journalize the transactions and post them to T-accounts.

Land 10 000
Cash 10 000
Accounts receivable 3 000
Sales revenue 3 000
Repair expense 600
Accounts payable 600
Cash 500
Accounts receivable 500
Accounts payable 300
Cash 300
Wages expense 400
Cash 400

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 Financial Statements Analysis Fall term Academic Year 2022-2023

Cash
July 15 500 July 1 10 000
July 20 300 Land
July 24 400 July 1 10 000

Accounts receivable
July 8 3 000 July 15 500

Sales revenue
July 8 3000

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 Financial Statements Analysis Fall term Academic Year 2022-2023

Repair expense
July 12 600

Accounts payable
July 20 300 July 12 600

Wages expense
July 24 400

4 Gaffney Company had these adjusting entry situations at the end of December:

a. On May 1, Gaffney Company paid $1 920 for a two-year insurance policy for its equipment.
The policy was for the period May 1 through April 30 (2 years). This is the first year of the
policy. The transaction was recorded as insurance expense.
b. On July 1, Gaffney Company paid $1 200 for one-year insurance policy for its property. The
policy was for the period July 1 through June 30. The transaction was recorded as prepaid
insurance and a reduction in cash.
c. On September 10, Gaffney Company purchased $600 of supplies for cash. The purchase was
recorded as supplies. On December 31, it was determined that various supplies had been
consumed in operations and that supplies costing $230 remained on hand.
d. Gaffney Company holds a note receivable for $2 000. This note is interest-bearing. The
interest will be received when the note matures. The note is one-year note receivable made
on June 30, bearing 5% simple interest.
e. As of December 31, Gaffney Company had received $800 for services to be performed in
January. The transaction was recorded as: Debit cash and credit Service revenue for $800.

Required: Journalize the adjusting entries at December 31.

Prepaid insurance 1 280

Insurance expense 1 280
Insurance expense 600
Prepaid insurance 600
Supplies expense 370
Supplies 370
Interest receivable 50
Interest income 50
Service revenue 800
Unearned revenue 800

5* Financial statements and other disclosures of public Tunisian companies (sociétés tunisiennes
faisant appel public à l'épargne) are available on the website of the financial market council (Conseil
du Marché Financier)

https://www.cmf.tn/?q=consultation-des-tats-financier-des-soci-t-s-faisant-ape

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 Financial Statements Analysis Fall term Academic Year 2022-2023

Required:

a. By referring to the link below, briefly list the main information presented in the notes to
financial statements (from I to V) of the group Société Chimique Alkimia:

https://www.cmf.tn/sites/default/files/pdfs/emetteurs/informations/rapports-societes/
alkimia_efc311221.pdf

Note I: The first note states the set of GAAP which constitutes the accounting framework of
preparation of the financial statements: Tunisian accounting system
Note II: It lists the main accounting principles underlying the financial statements+ monetary
unit used (Tunisian dinar)
Note III: The note points out that the statements are consolidated statements for the group
Alkimia SA and its subsidiaries+ main principles of consolidation
Note IV: Perimeter and methods of consolidation: the note explains the following:
- the status of parent and subsidiary for each member of the group
- the equity method in the case of significant influence and the method of consolidation
used in the case of controlling interest
- the reasons why a foreign subsidiary was excluded from the consolidation because it is in
the liquidation phase
Note V: This note explains the main accounting methods used to account for:
- revenues
- long-term investments
- transactions in foreign currency
- tangible and intangible non-current assets
- consolidation
- differed taxes
b. Based on the audit report presented together with the financial statements, determine the
nature of the audit opinion.

Based on the audit report, the audit opinion is an unqualified opinion with an explanatory
paragraph. In fact, the opinion statement states that the financial statements present fairly
the financial situation on December 31, 2021, its financial performance and its cash flows in
conformity with the Tunisian accounting system. Another paragraph was added below
entitled Significant uncertainty about the business continuity.