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.