Projekt współfinansowany ze środków Unii Europejskiej w ramach Europejskiego Funduszu Społecznego

Fundamentals of Financial Accounting

Rafał Grabowski

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Dr Rafał Grabowski
 Projekt współfinansowany ze środków Unii Europejskiej w ramach Europejskiego Funduszu Społecznego

Contents
Introduction ........................................................................................................................................... 4
CHAPTER I Business Environment and Accounting ................................................................................. 5
I.1 Information as a Basis of Wise Decisions about Allocation of Resources ........................... 5
I.2 The General Concept of Accounting.................................................................................... 7
I.2.1 The Definition and Types of Accounting ............................................................................. 7
I.2.2 The Monetary Unit Assumption (Principle) ......................................................................... 9
I.2.3 The Balance Method ........................................................................................................... 9
I.2.4 The Entity Assumption (Principle) ..................................................................................... 12
I.3 Summary............................................................................................................................ 14
I.4 Exercises ............................................................................................................................ 15
CHAPTER II Balance Sheet: the Concept and Recognizing of Assets, Liabilities and Owners’ Equity ... 18
II.1 The General Concept of Financial Statements .................................................................. 18
II.2 The General Concept of a Balance Sheet .......................................................................... 19
II.3 Recognition Criteria of Assets ........................................................................................... 22
II.4 Recognition Criteria of Owners’ Equity and Liabilities ...................................................... 25
II.5 The Actual Layout of a Balance Sheet in Accordance with the Accounting Act ................ 27
II.6 Summary............................................................................................................................ 31
II.7 Exercises ............................................................................................................................ 31
CHAPTER III Business Transactions within the Accounting System (part I)........................................... 37
III.1 Business Transactions and Their Influence on the Financial Position of an Entity ........... 37
III.2 Measurement of business transactions ............................................................................ 41
III.3 Documentation of business transactions .......................................................................... 42
III.4 Recording of business transactions ................................................................................... 44
III.5 Summary............................................................................................................................ 62
III.6 Exercises ............................................................................................................................ 63
CHAPTER IV Profit and Loss Account ..................................................................................................... 67
IV.1 The General Concept of Profit (Loss), Revenues, and Expenses ....................................... 67
IV.2 Recognition and measurement of revenues and expenses .............................................. 70
IV.3 The Division of Income ...................................................................................................... 78
IV.4 Summary............................................................................................................................ 80
IV.5 Exercises ............................................................................................................................ 82
CHAPTER V Business Transactions within the Accounting System (part II) .......................................... 89
V.1 Recording Revenues and Expenses ................................................................................... 89
V.2 Transferring Revenues and Expenses to the “Net Profit (Loss)” Account ......................... 94

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V.3 Summary............................................................................................................................ 97
V.4 Exercises ............................................................................................................................ 97

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Introduction
This manual is designed for students who are starting to learn (study) accounting. It
contains a description of the key issues that are discussed during the course "Accounting".
However, it should be noted that the manual cannot be considered as an alternative to the
lectures - it may be treated only as an addition to the lectures. The manual describes the
theory. However, it also contains examples and exercises that are helpful in understanding
described issues.
This manual was written as a part of the project “Young Teachers Prepare a
Management Course in English” implemented at the Warsaw School of Economics.
Therefore, I offer thanks to all those who initiated and pursued this project.

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 Projekt współfinansowany ze środków Unii Europejskiej w ramach Europejskiego Funduszu Społecznego

CHAPTER II
Balance Sheet: the Concept and Recognizing of Assets,
Liabilities and Owners’ Equity

II.1 The General Concept of Financial Statements

There is no doubt that economic information about a business entity is needed by
external stakeholders. They need this information in order to decide whether and how to deal
with an entity. Most of external stakeholders are not in the position to demand reports that
would be tailored to meet their particular information needs. And that is why to ensure that
external stakeholders will obtain appropriate information, financial accounting is heavily
regulated within the law or within the generally accepted standards. In accordance with these
regulations entities must prepare and publish specific reports which are called financial
statements. A board of directors is responsible for the preparation of financial statements as
well as for the fulfilment of other obligations specified in the Accounting Act.
Financial statements are prepared for a specific time span the so-called reporting
period. The most common reporting period covered by financial statements is the financial
year which lasts 12 consecutive calendar months. Usually entities apply the calendar year as
the financial year.
Financial statements that are prepared in accordance with the Accounting Act consist
of:
1. a balance sheet (also called a statement of financial position);
2. a profit and loss account (also called a profit and loss statement, an income statement);
3. notes to the financial statements, including an introduction to the financial statements as
well as additional notes and explanations.
Financial statements which are subject to annual audit also include:
4. a statement of changes in equity (also called a statement of changes in stockholders’
equity); and
5. a cash flow statement (also called a statement of cash flows).

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Exhibit II.1 Components of Financial Statements in Accordance with the Accounting

Act

Financial statements

A statement of changes in equity

A balance sheet
(Included in financial statements which are
(Included in all financial statements)
subject to annual audit)

A cash flow statement

A profit and loss account (Included in financial statements which are
(Included in all financial statements) subject to annual audit)

Notes to the financial statements

(Included in all financial statements)

II.2 The General Concept of a Balance Sheet

The rest of this chapter is devoted to a balance sheet. A balance sheet is a report that
describes the financial position of an entity in terms of assets, owners’ equity, and liabilities.
Each balance sheet is prepared as at a specific point in time - the so-called balance sheet date
which is the last day of a reporting period covered by financial statements. Since a balance
sheet is prepared as at a specific point in time, there is a saying that a balance sheet is a
“picture” of an entity’s assets, owners’ equity and liabilities.
Each balance sheet should include the value of an entity’s assets, liabilities, and
owners’ equity as at a balance sheet date as well as the so-called comparative information.
Comparative information is included in order to ensure comparability both with an entity’s
financial statements of previous periods and with financial statements of other entities.
Comparative information should be disclosed in respect of the previous period for the all
amounts reported in a balance sheet (see Exhibit III.2). For example if our entity prepares a

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balance sheet as at 31 December 2011, then it should include the values of assets, liabilities
and owners’ equity as at 31 December 2011 and values of assets, liabilities and owners’
equity as at 31 December 2010.
Assets, owners’ equity and liabilities are not homogeneous groups. They are divided
into particular categories. Thus, to prepare a balance sheet we need to know the so-called
recognition criteria for assets, liabilities, and owners’ equity, but also we need to know how
to assess values of them (assets, and so on). At this stage our attention will be paid to the
recognition criteria. These criteria enable us to:
1. categorize assets, liabilities, and owners’ equity;
2. assign resources to the specific categories of assets;
3. assign debts and other obligations to the specific categories of liabilities;
4. assign pieces of owners’ equity to the specific categories of equity.
The simplified structure of balance sheet is presented on exhibit II.2.

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Exhibit II.2 The simplified structure of a balance sheet (in accordance with the
Accounting Act)
31.12.2010 31.12.20112
A. NON-CURRENT ASSETS
I. Intangible assets
II. Tangible assets
III. Long-term receivables
IV. Long-term investments
V. Long-term prepayments
B. CURRENT ASSETS
I. Inventories
II. Short-term receivables
III. Short-term investments
IV. Short-term prepayments
TOTAL ASSETS

31.12.2010 31.12.2011
A. OWNERS’ EQUITY
I. Share capital
II. Called up share capital (-)
III. Own shares (-)
IV. Supplementary capital
V. Revaluation reserve
VI. Other reserves
VII. Retained earnings (losses)
VIII. Net profit (loss)
IX. Write-off on net profit during the financial year (-)
B. LIABILITIES AND PROVISIONS
I. Provisions (long term and short-term)
II. Long-term liabilities
III. Short-term liabilities
IV. Accruals
TOTAL LIABILITIES AND OWNERS’ EQUITY

In accordance with the Accounting Act assets are “resources of a reliably estimated
value controlled by an entity, resulting from the past events, and causing in the future the
inflow of economic benefits to the entity”.
Generally, assets are listed on a balance sheet in order of liquidity: from the least
liquid to the most liquid assets. Liquidity is a feature of assets that informs about ability to
convert these assets into money.
The basic division of assets include non-current assets and current assets. The
criterion of this division is time within which it is expected to obtain economic benefits from

2
It is assumed that balance sheet date is 31st of December 2011.

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assets. Generally, if we expect to obtain economic benefits from assets within 12 months then
we should classify these assets as current assets; if we expect to obtain economic benefits
from assets during the period longer than 12 months, then we should treat those assets as non-
current. This rule is only general and should be applied together along with detail rules that
complement it. These specific rules relate especially to: investments in real property and in
intangible assets, trade receivables and inventories.

II.3 Recognition Criteria of Assets

Intangible assets are resources which hold four conditions. Firstly, intangible assets
are not physical, however they may be – and usually are – recorded or written on items that
have a physical form. For example, software, patents, copyrights are not physical, but they are
written or recorded on hard drives, discs, or paper. Secondly, intangible assets are resources
that are acquired for the purpose of an entity’s own use. It means that an entity may use them
in offices, shops, manufactures, and so on, but they (intangible assets) should not be intended
for resale or assembly as a part of goods that are produced by an entity. Thirdly, a period - in
which it is possible to use them (intangible assets) and obtain economic benefits - should last
longer than one year. In accounting this sort of period is called useful life. The fourth
condition holds that intangible assets should be acquired. Generally, it is not allowed to
recognize resources as intangible assets if they were not acquired, but – for example – created
or produced by entity’s employees. There is one exception from this rule and it is related to
development projects.
In accordance with Accounting Act, intangible assets include in particular:
a) copyrights and similar rights, licences, concessions;
b) rights to inventions, patents, trademarks, designs and decorative patterns;
c) know-how;
d) goodwill;
e) costs of completed development projects;
f) advances for items that will be classified as intangible assets.
The second large group of non-current assets are tangible assets. In reality they are
divided into three smaller line items (see Exhibit II.3): (1) Property, plant, and equipment,

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(2) Property plant and equipment under construction, and (3) Advances for property, plant,
and equipment.
Property, plant, and equipment are different to some extent than intangible assets,
however there is also an overlap between them. There are four conditions that must be held to
recognize resources as property, plant, and equipment. Firstly, they should be physical.
Examples are: plots, buildings, trucks, computers, and machineries. Secondly, they should be
intended for an entity’s own use. Thirdly, they should be complete and usable. The fourth
condition holds that their useful life should exceed one year. In contrast to intangible assets, in
case of property, plant and equipment it is allowed to acquire them but also build them by an
entity.
In accordance with the Accounting Act, property, plant, and equipment include in
particular:
a) real property, including land, rights to perpetual usufruct of land, structures and buildings,
as well as premises to which an entity has a separate title of ownership, co-operative title
of ownership to a business premises;
b) machinery, equipment, vehicles and other items;
c) leasehold improvements;
d) livestock.
Property, plant, and equipment under construction comprise property, plant and
equipment in the time of their construction or assembly. This group of assets also includes
improvements of already existing items of property, plant, and equipment. An improvement is
recognized as property, plant, and equipment under construction if one condition holds. The
usefulness of the improved asset must be higher than the usefulness that was at the beginning,
when this asset was acquired. The usefulness of an asset is measured in terms of a useful life,
productivity, quality of products manufactured with the use of an improved item of assets,
operating expenses, or other criteria.
When the process of construction, assembly, or improvement is finished and an asset
is complete and usable, than it should not be recognized as the part of property, plant, and
equipment under construction any more. Such an asset should be classified as property, plant
and equipment.

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Advances for property, plant, and equipment under construction are amounts of
money paid or transferred upfront to suppliers which are expected to supply resources that
finally will be classified by an entity as property, plant, and equipment.
Receivables are amounts due to an entity from other companies or from individual
customers. Usually receivables arise when an entity sells on credit, however there are also
other situations in which they arise. Receivables are divided into long-term receivables and
short-term receivables. Long-term receivables include amounts due with maturity longer
than 12 months from a balance sheet date. However, there is one exception from this rule.
Trade receivables should always be recognized as short term receivables. Thus, short term
receivables comprise all trade receivables and a whole or a part of other receivables that
mature within 12 months from the balance sheet date. Trade receivables are those that arise as
a result of selling on credit goods and services within an entity’s core business.
Investments are assets acquired in order to derive economic benefits resulting from an
increase in the value of these assets, generation of income in the form of interest, dividends
(participation in profits) or other reward, including rewards from a commercial transaction, in
particular financial assets and those real property and intangible assets which are not used in
an entity but which have been acquired to derive such benefits. Investments, similarly to
receivables, are divided into long-term and short-term. Long-term investments include
investments in real property and in intangible assets, but also financial assets with maturity
longer than 12 months from a balance sheet date. Short term assets, on the other hand,
comprise whole monetary assets and those investments which are payable or mature or are
held for sale within 12 months from a balance sheet date or the date of their origination, issue
or acquisition.
The last group within non –current assets is long-term prepayments. The similar
group of assets occurs within current assets and is called short-term prepayments. To
understand clearly these two terms (long-term and short-term prepayments) it is necessary to
possess knowledge about rules and items that so far were not described. And that is why the
meaning of these two terms will be explained in the later part of this book.
Non-current assets constitute the first large group of resources. The second one is
called current assets. They include:
I. Inventories;

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II. short-term receivables;

III. short-term investments; and
IV. short-term prepayments.
Since short-term receivables, and short-term investments are described above, and
short-term prepayments are beyond the scope of this chapter, at this stage we consider only
inventories.
Inventories include materials acquired for an entity’s own use, finished goods
(products and services) manufactured or processed by an entity which are ready for sale or
work in progress, semi-finished goods, and goods acquired for resale in an unprocessed form.
Inventories are recognized as current assets regardless of whether they are held for sale or
consumption within 12 months from a balance sheet date or within longer period if the length
of this period is result of normal operating cycle characteristic to a given type of operations.
The term “operating cycle” means the period of time from when money is used to acquire raw
materials, goods, services until money is received as a result of sold goods and services. The
length of operating cycle is different for different entities and their core businesses. For
example, in some cases the process of wine production lasts longer than 12 months.
Nevertheless semi-finished wine which should mature more than 12 months from a balance
sheet date should be recognized as inventories within current assets.

II.4 Recognition Criteria of Owners’ Equity and Liabilities

A balance sheet describes on the one hand resources that are called assets, on the other
hand - sources of assets funding. They are listed on a balance sheet in order in which they
are due, and they are recognized as owners’ equity or liabilities.
As it is written in the previous chapter, owners’ equity is a source of assets funding,
but also it reflects an entity’s obligation to its owners. This obligation is specific – there is not
due date. It doesn’t mean that this obligation must be fulfilled on demand. Just the opposite.
There are only a few and specific situations (circumstances) when this obligation must be
fulfilled. And that is why there is a saying that owners’ equity is the safest source of assets
funding. The owners’ equity presented on Exhibit II. 2 includes:
I. Share capital
II. Called up share capital (-)
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III. Own shares (-)

IV. Supplementary capital
V. Revaluation reserve
VI. Other reserves
VII. Retained earnings (losses)
VIII. Net profit (loss)
IX. Deductions from net profit during the financial year (-)
Owners’ equity is created and affected by actions taken by: (1) owners, and (2) an
entity. Two flagship examples of this statement that are most appropriate at this stage are:
share capital and net profit (loss).
Share capital was explained in the previous part of this book. This sort of owners’
equity arises when owners contribute to their entity resources. Under such circumstances such
an entity on the one hand obtains resources that are recognized as assets, on the other hand
arises an obligation that is called share capital.
Net profit, in contrast to share capital, is created and affected by an entity. When an
entity is established then it performs on its own account. The performance of an entity for a
specific period, usually one year (financial year), expressed in terms of money is called net
profit or net loss. Since this issue is more complex it will be explained in detail in the later
part of this book.
Liabilities are defined in the Accounting Act as “entity’s obligations arising from the
past events to provide goods, or services of a reliably estimated value, and which will involve
the use of existing or future assets of the entity”. The obligations, that are called liabilities,
may be fulfilled by making payments, supplying goods or providing services. Liabilities are
divided basically into long-term liabilities and short-term liabilities. Long-term liabilities
include liabilities that are due to be paid within the period of time longer than 12 months from
a balance sheet date. However, there is one exception from this rule. Liabilities that are called
trade payables should be always recognized as short term liabilities. Thus, short –term
liabilities comprise all trade payables as well as the whole or a part of other liabilities which
mature within 12 months from a balance sheet date. Trade payables are those liabilities which
arise as a result of activities within core business of an entity. For example, they may arise
when an entity buys raw materials on credit.

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Provisions are similar to liabilities, however one difference occurs. Provisions are
those liabilities whose due dates or amounts are not certain.
The last group within sources of assets funding is called accruals. Since
understanding the meaning of this term is conditioned by knowledge about rules and items
that so far were not described, the term “accruals” will be explained in later part of this book.

II.5 The Actual Layout of a Balance Sheet in Accordance with the

Accounting Act
As a conclusion of this part of the chapter it should be emphasized that the recognition
criteria that are described above are consistent with the Accounting Act. However, the line
items of assets and liabilities that are presented on Exhibit II.2 should be divided in reality
into smaller groups. The actual layout of a balance sheet that lists all smallest line items is
presented on Exhibits II.3-5.

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Exhibit II.3 The actual layout of a balance sheet in accordance with the Accounting
Act – non-current assets
31.12.2010 31.12.20113
A. NON-CURRENT ASSETS
I. Intangible assets
1. Costs of completed development projects
2. Goodwill
3. Other intangible assets
4. Advances for intangible assets
II. Tangible assets
1. Property, plant and equipment
a) Land (of which: rights to perpetual usufruct of land)
b) Buildings and structures
c) Equipment and machinery
d) Means of transportation
e) Other
2. Property, plant and equipment under construction
3. Advances for property, plant and equipment under construction
III. Long-term receivables
1. Amounts due from related entities
2. Amount due from other entities
IV. Long-term investments
1. Real property
2. Intangible assets
3. Long-term financial assets
a) in related entities
- shares
- other securities
- loans
- other long-term financial assets
b) in other entities
- shares
- other securities
- loans
- other long-term financial assets
4. Other long term investments
V. Long-term prepayments
1. Deferred tax assets
2. Other prepayments and accruals

3
It is assumed that a balance sheet date is 31st of December 2011.

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Exhibit II.4 The actual layout of a balance sheet in accordance with the Accounting
Act – current assets
31.12.2010 31.12.20114
B. CURRENT ASSETS
I. Inventories
1. Materials
2. Semi-finished products and work in progress
3. Finished products
4. Goods for resale (Merchandise)
5. Advances on supplies
II. Short-term receivables
1. Amounts due from related entities
a) trade receivables with maturity of:
- up to 12 months
- over 12 months
b) other
2. Amounts due from other entities
a) trade receivables with a maturity of
- up to 12 months
- over 12 months
b) receivables relative to taxes, subsidies, customs duties, social and health
insurance, and other benefits
c) other
d) receivables under litigation
III. Short-term investments
1. Short-term financial assets
a) in related entities
- shares
- other securities
- loans
- other short-term financial assets
b) in other entities
- shares
- other securities
- loans
- other short-term financial assets
c) cash and other money assets
- cash in hand and at bank
- other cash and cash equivalents
- other money assets
2. Other short-term investments
IV. Short-term prepayments
TOTAL ASSETS

4
It is assumed that a balance sheet date is 31st of December 2011.

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Exhibit II.5 The actual layout of a balance sheet in accordance with the Accounting
Act – current assets
31.12.2010 31.12.20115
A. OWNERS’ EQUITY
I. Share capital
II. Share capital not paid up (-)
III. Own shares (-)
IV. Supplementary capital
V. Revaluation reserve
VI. Other reserves
VII. Retained earnings (losses)
VIII. Net profit (loss)
IX. Deductions from net profit during the financial year (-)
B. Liabilities and provisions
I. Provisions
1. Deferred tax provisions
2. Provisions for pension and other post-employment benefits
- long-term
- short-term
3. Other provisions
- long-term
- short-term
II. Long-term liabilities
1. to related entities
2. to other entities
a) credits and loans
b) issuance of debt securities
c) other financial liabilities
d) other
III. Short-term liabilities
1. to related entities
a) trade payables with maturity of:
- up to 12 months
- over 12 months
b) other
2. to other entities
a) credits and loans
b) issuance of debt securities
c) other financial liabilities
d) trade payables with maturity of:
- up to 12 months
- over 12 months
e) payments received on account
f) bills of exchange
g) taxes, custom duties, and social security
h) payroll liabilities
i) other
3. Special funds
IV. Accruals
1. Negative goodwill
2. Other accruals
- long-term
- short-term
TOTAL LIABILITIES AND OWNERS’ EQUITY

5
It is assumed that balance sheet date is 31st of December 2011.

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II.6 Summary
In accordance with the Accounting Act, business entities are obligated to prepare
financial statements. Financial statements that are prepared in accordance with the act
comprise: a balance sheet, a profit and loss account, and notes to the financial statements.
Besides, financial statements that are subject to annual audit should include a statement of
changes in equity and a cash flow statement. Within this chapter we focused on a balance
sheet.
A balance sheet is a report that describes financial position of an entity in terms of
assets, owners’ equity, and liabilities. A balance sheet is prepared as at a specific point in time
– the so-called balance sheet date. A balance sheet date is a last date of reporting period
covered by financial statements.
In order to prepare a balance sheet it is necessary to know recognition criteria and
valuation methods. In this chapter we concentrated on recognition criteria which enable us to:
1. categorize assets, liabilities, and owners’ equity;
2. assign resources to specific categories of assets;
3. assign debt and other obligations to specific categories of liabilities;
4. assign pieces of owners’ equity to specific categories of equity.

II.7 Exercises

Exercise II.1 Preparation of a balance sheet

The Woodpecker Ltd manufactures and sales wood furniture. On 31 December 2011 the
company controlled resources and had following sources of asset funding that are listed
below.
Required
1. Recognize listed resources and sources of assets funding.
2. Prepare a simplified balance sheet of Woodpecker Ltd as at 31 December 2011.

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Resources and sources of assets funding

Nr Description of resources and sources of assets funding Balance Sort of assets /
liabilities / owners’
equity
1. Office supplies 5 000.00
2. Cash on hand in the store 9 800.00
3. Land 140 000.00
4. Building that is used as a store 250 000.00
5. Desks that are in the offices 7 300.00
6. Chairs that are in the office 2 400.00
7. Trucks that are used for the purpose of delivering goods 89 000.00
to the customers
8. Amount due to the bank arising from the credit 210 000.00
9. Cars that are used by the board of directors 75 000.00
10. Printers that are used in the offices 1 700.00
11. Software MS Office that is used in the offices 1 100.00
12. Software that is used in the accounting department 1 300.00
13. Wood acquired for the purpose of producing furniture 370 000.00
14. Glue used for the purpose of producing desks 7800.00
15. Machinery acquired for the purpose of producing 275 000.00
furniture
16. Building that is used by board of directors, marketing 230 000.00
department, and accounting department
17. Plant 370 000.00
18. Boxes that will be used to wrap furniture that will be sold 22 000.00
in the store
19. Desks that were produced for sale 71 000.00
20. Desks that are used in the offices 7 900.00
21. Desks that have not been finished yet 21 000.00
22. Chairs used in the offices 2 400.00
23. Spare toners for the printers 1 300.00
24. Acquired decorative patterns that are used within process 13000.00
of production
25. Amounts due to suppliers of raw materials 47 500.00
26. Land acquired and held for resale. 173 000.00
27. Amounts due from customers 33 000.00
28. Obligation to pay amount of money to the Internal 11 900.00
Revenue (arising from the income tax)
29. Amount that should be paid to the employees for their 54 000.00
work
30. Money on the entity’s account 99 000.00
31. Chairs that were acquired for resale 12 700.00
32. Obligation to provide services as a result of the guarantee 7 400.00
(estimated)
33. Share capital … Owners’ equity

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Dr Rafał Grabowski
 Projekt współfinansowany ze środków Unii Europejskiej w ramach Europejskiego Funduszu Społecznego

Answer:
31.12.2011
A. NON-CURRENT ASSETS .........................
I. Intangible assets .........................
II. Tangible assets .........................
III. Long-term receivables .........................
IV. Long-term investments .........................
V. Long-term prepayments 0,00
B. CURRENT ASSETS .........................
I. Inventories .........................
II. Short-term receivables .........................
III. Short-term investments .........................
IV. Short-term prepayments 0,00
TOTAL ASSETS .........................

31.12.2011
A. OWNERS’ EQUITY .........................
I. Share capital .........................
II. Called up share capital (-) 0,00
III. Own shares (-) 0,00
IV. Supplementary capital 0,00
V. Revaluation reserve 0,00
VI. Other reserves 0,00
VII. Retained earnings (losses) 0,00
VIII. Net profit (loss) 0,00
IX. Write-off on net profit during the financial year (-) 0,00
B. LIABILITIES AND PROVISIONS .........................
I. Provisions (long term and short-term) .........................
II. Long-term liabilities .........................
III. Short-term liabilities .........................
IV. Accruals .........................
TOTAL LIABILITIES AND OWNERS’ EQUITY .........................

Exercise II.2 Multiple Choice Questions

1. Financial statements that are prepared in accordance with the Accounting Act and which
are not subject to annual audit should include:
a) a balance sheet
b) a profit and loss account
c) notes to the financial statements
d) a statement in changes in equity
e) a cash flow statement

33
Dr Rafał Grabowski
 Projekt współfinansowany ze środków Unii Europejskiej w ramach Europejskiego Funduszu Społecznego

2. Financial statements that are prepared in accordance with the Accounting Act and which
are subject to annual audit should include:
a) a balance sheet
b) a profit and loss account
c) notes to the financial statements
d) a statement in changes in equity
e) a cash flow statement
3. A balance sheet is prepared:
a) as at specific point in time – the so-called reporting period
b) for a specific period of time – the so called balance sheet date
c) for a specific period of time – the so-called reporting period
d) as at specific point in time – the so-called balance sheet date
4. The so-called recognition criteria enable us to:
a) determine value of assets, owners’ equity, and liabilities
b) categorize assets, owners’ equity and liabilities
c) assign resources to the specific categories of assets
d) assign debts and other obligations to the specific categories of liabilities
e) assign pieces of owners’ equity to the specific categories of equity
5. Generally, assets are listed in a balance sheet in order of:
a) maturity
b) liquidity
c) value
d) all the same - it does not matter
6. Resources that are categorized as intangible assets:
a) should be physical
b) should not be physical
c) should be intended for an entity’s own use
d) should be acquired in order to obtain economic benefits as a result of a commercial
transaction
e) should generate economic benefits for the period longer than one year

34
Dr Rafał Grabowski
 Projekt współfinansowany ze środków Unii Europejskiej w ramach Europejskiego Funduszu Społecznego

7. Resources that are categorized as tangible assets:

a) should be physical
b) should not be physical
c) should be intended for an entity’s own use
d) should be acquired in order to obtain economic benefits as a result of a commercial
transaction
e) should generate economic benefits for the period longer than one year
8. Which of the following is an example of tangible assets?
a) a truck that is intended for the sale as a part of merchandise
b) a machine during its of assembly, that is intended for the production
c) a complete and usable building
d) a patent
9. Receivables are:
a) amounts due to an entity
b) amounts due from an entity
c) amounts due to and from an entity
10. Short-term liabilities include:
a) trade payables
b) trade receivables
c) only these liabilities which mature within 12 months form a balance sheet date
d) liabilities which mature within 12 months form a balance sheet date
11. Net profit (loss) is included as a part of:
a) non-current assets
b) current assets
c) owners’ equity
d) liabilities
12. Net profit (loss) is:
a) created and affected by an entity
b) a measure of performance of an entity expressed in terms of money
c) is calculated for specific period of time – the so-called reporting period
d) is calculated as at specific period in time – the so-called balance sheet date

35
Dr Rafał Grabowski
 Projekt współfinansowany ze środków Unii Europejskiej w ramach Europejskiego Funduszu Społecznego

13. Provisions are:

a) these receivables whose due dates or amounts are not certain
b) these liabilities whose due dates or amounts are not certain
c) also called share capital

36
Dr Rafał Grabowski