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Hi.
Else here.
And in this video, we'll be discussing
how to approach a financial statement
question on a test or exam.
Let's be honest.
In higher education, what really counts?
When you write any kind of assessment,
be it a quiz, test, or final exam, marks count.
Knowing that, you can use a series of steps
when attacking a financial statement
question that will help you get the maximum amount of marks.
But before we talk about that, we
have to talk about transferring knowledge.
Giving you a roadmap to use when answering a question is great.
But unless you know how to use it
regardless of the structure of the question,
it's almost useless.
Research shows that students have a hard time transferring
knowledge to new situations.
They might be able to do one style of question perfectly.
But change that question around even a little bit,
and they're unable to apply their knowledge.
Let's do an example to see this.
Pause the video to answer this question.
You've already been introduced to the accounting equation.
Which of the following is the correct accounting equation?
Many of you likely said C, assets
equals liabilities plus equity.
But the answer is actually E, all of the above.
To figure this out, let's replace
assets with the number 10, liabilities with the number 7,
and equity with the number 3.
If we replace all of the letters with these numbers,
you can quickly see that all of these equations are correct.
3 does equal 10 minus 7.
And 7 plus 3 minus 10 is equal to 0.
All of the equations are correct.
Recognizing that required us to see
that the structure of the question didn't matter.
The underlying math did.
How can we combat the issue of not
being able to transfer knowledge to new situations?
It's really important to practice
different types of questions.
In addition, by realizing that this is a common problem,
you're able to focus on the required in the question.
The required tells you what you need to do.
How the question is structured is immaterial
and should be ignored.
Let's look at what I'm talking about with
regards to a question about financial statements.
A financial statement question can be structured
in a few different ways.
You might get a list of accounts in alphabetical order.
Or you might get a list of accounts in random order.
One of the most challenging is when
you're provided with one or more financial statements.
But they're incorrect, and you have
to produce corrected statements.
Note that for this question the information
may be provided in a different format,
but the required is still the same.
Understanding that is key in solving problems.
A final style, you might get a trial balance.
This is probably the easiest type
of financial statement question and one
that I almost never give my students.
In each of the questions I just showed you,
I used the exact same list of accounts.
But I changed the structure of the question
by changing how I gave you the list.
Although the structure of the question,
the way the information was provided to you, was different,
these questions are essentially the same.
Why?
Because the required is the same.
It's the required you need to focus on,
not the structure of the question.
In each of these questions, the required
is to provide the financial statement.
And that's what you need to focus on.
Now that we understand this, let's
take one of the styles of questions
and see what steps you could use to solve it.
I'm going to take the list of accounts in random order
to demonstrate the steps.
I suggest you pause the video and download the statement
from my website.
Try to solve it first yourself using whatever method
you've used in the past.
Then start the video again, and use
the steps I'm demonstrating to solve the same problem.
See which you prefer and which gets you the right answer.
Step one, read the required, and then read it again.
You've been provided with a list of financial statement
accounts.
Required-- provide a Statement of Financial Position, also
called a Balance Sheet under ASPE, for Green Company.
Now read it again.
You've been provided with a list of financial statement
accounts.
Required-- provide a statement of financial position,
also called a balance sheet under ASPE, for Green Company.
Once you know which financial statement you have to produce,
you can move on to step two.
On your answer sheet, write down the heading
of the statement you're required to produce,
including the name of the company,
the title of the financial statement,
and the required dating.
The dating would be either a point in time
or a period of time depending on the statement
you have to produce.
Why is this important?
Because by doing this you help to focus your attention
on exactly what the required really means.
And that helps to guide you as you move forward.
Step three, classify the accounts
you've been given into the financial statement elements.
Now, this step assumes that you have a list of the elements
and you know their definitions.
If you're still struggling with this,
please see the video on Financial Statement Elements.
If you haven't memorized the elements and their definition,
it's going to be difficult for you to move forward
in any financial statement question.
Be sure to write the elements next to each account name.
This is a really important step.
Why?
Because later on if you have to recheck your categorization,
you don't have to do the whole thing over again.
Step four, classify all the assets and liabilities
into their subcategories.
What are the subcategories?
For assets, divide them into current assets;
long-term investments; property, plant, and equipment;
intangibles; goodwill; and other assets.
For liability, this means dividing them
into current and non-current.
Notice I've used short forms for my sub-classifications.
For instance, CL is current liabilities; PPE, property,
plant, and equipment.
Again, write the subcategories next to each account name
so that you have them for future reference.
Step five, whichever statement you're required to produce,
write down the heading and subheadings
on your answer sheet.
Leave ample room to list the accounts
under each of the headings and subheadings.
This sets up your statement so that it basically
becomes a fill in the blank.
Note, I've only written down the subheadings
I need for this question.
I could have written them all down,
but that would be a waste of my time.
And there's never enough time on a test or exam anyway.
Then I can move on to step six.
Write down the accounts and their related amounts
under the correct subheading using classifications
you produced in steps three and four.
The trick here is to remember the order.
Since we're using the North American convention of order
of liquidity, I've listed the current assets from cash
to inventory.
Notice that I've omitted prepaid insurance because the balance
was zero.
I've also listed the liabilities in order of liquidity,
from those settled first to those settled last.
Sometimes this is a bit of a guess.
How do I know that Taxes Payable should
be listed before Wages Payable?
In the case where the order is not clear,
I always list accounts payable and accrued liabilities first
with everything else following in random order.
Notice that retained earnings is still blank.
We'll address that issue in a minute.
Moving on to step seven, add the accounts
under each heading and subheading to create
all the subtotals and totals.
Here, I added total current assets, total property, plant,
and equipment, as well as total assets.
On the liability side, I added total current liabilities
and total liabilities.
Notice I don't have a subtotal for the non-current liabilities
because there's only one line item under this subheading,
so a subtotal's not required.
In addition, notice I can't provide
total shareholders' equity or total liabilities and equity.
That's because I don't have a retained earnings number.
And I can't figure it out.
Or can I?
Let's go back to our understanding of the accounting
equation to check this out.
The accounting equation is assets
equals liabilities plus equity.
For this statement I know that assets are $676,215.
I also know that liabilities are $358,600.
Using the equation, I can solve for equity.
Equity is $317,615.
Let's put that back into our Statement
of Financial Position.
What do I already know about equity?
Well, I know that common shares are 100,000.
Knowing that equity equals common shares
plus retained earnings, I now know
that retained earnings is $217,615.
It's pretty simple when I use the accounting
equation to figure it out.
I can now fill in the total liabilities and equity
amount of $676,215.
Could I have filled in this amount a long time ago?
Absolutely.
That's because I know that total assets always equal
total liabilities plus equity.
Now, what if, when you complete your financial statement,
your statement doesn't balance?
Likely, you've done something wrong.
For instance, you may have put customer deposits
into current assets because you didn't know
what this account really meant.
Just so you know, it means that customers
have given the company cash, and the company
has to repay them in the future.
So it's a liability.
But what if you didn't know this at the time
and you put it under assets, and now your statement doesn't
balance?
What do you do?
When this happens, I've seen students continue
to work on a question for 20, 30, 40 minutes,
sometimes longer.
It's absolutely crazy.
When you can't get your financial statement to balance,
what should you do?
You should move on.
You're going to get more marks and finish more of the exam
if you leave the question and move on to the next question.
If you want, turn down the corner of your page.
If you have time at the end of the exam,
you can come back to this question.
But you should never rework your solution
if you still have other questions on the test that
are unfinished.
I actually know it's really difficult to do this.
But you have to let it go and just move on.
OK.
Let's look at the steps to attack a financial statement
question one more time.
Step one, read the required twice.
Step two, on your answer sheet, write down
the heading of the statement you're required to produce,
including the company name, the title
of the financial statement, and the required dating.
Step three, classify the accounts
into financial statement elements.
Step four, classify all the assets and liabilities
into their subcategories.
Step five, on your answer sheet, write down
the headings and subheadings for the financial statement
you have to produce.
Step six, write down the accounts and their related
amounts under the correct heading or subheading.
Step seven, add the accounts to create all the subtotals
and totals.
Remember, the structure of the question doesn't matter.
You can apply these steps to any style of question,
be it a random listing of accounts
or an incorrect financial statement.
You can apply the steps no matter what financial statement
you need to produce or whether you're following ASPE or IFRS.
Following the steps is key to getting the correct solution.
That's because following the steps
lets you focus on what's important-- the required
in the question and the categorization
of the accounts into the financial statement elements.
That's the most challenging part of any financial statement
question.
Now you have the steps required to solve a financial statement
question.
But following a series of steps alone
won't get you maximum marks.
What will?
Using these steps consistently as you practice, practice,
and practice more questions and problems from your textbook.
Make sure you practice consistently,
completing one or two questions every week.
That'll help you even more.
Finally, when you do practice, close your books
and put away your notes unless you know the assessment is
an open-book test.
If your assessment is going to be closed book,
practicing with your textbook or notes open and available
is going to give you a false sense of security.
When you actually write the assessment,
you won't have that crutch.
And it'll likely cause you problems.
The key to high marks is pretty straightforward.
Practice often.
Practice consistently.
Practice using the same environment
you'll experience when writing the assessment.
We've now completed the lecture videos on financial statements.
It's time for you to go and, you guessed it, practice.
Good luck on your studies of accounting.
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