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.

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.

3 Why are notes to financial statements necessary?

4 What are the roles of management and the auditor in the preparation and integrity of the 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.

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 Financial Statements Analysis Fall term Academic Year 2022-2023

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.

6 Why do some unqualified opinions have explanatory paragraphs?

7 What are contingent liabilities?

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

b. A doubtful customer goes bankrupt
c. Inventory destruction in fire
d. Death of a board member

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?

10 What is the basic guideline for consolidation?

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.

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.
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.

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f. On March 1, Cook borrowed $100 000 from a bank at an annual interest rate of 6 %. The first
year interest payment amounts to $6 000 and is due on March 1, N+1.

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.

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.

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

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

b. Based on the audit report presented together with the financial statements, determine the
nature of the audit opinion.

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Financial Statements Analysis Fall term Academic Year 2022-2023