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Chapter 2: 5E (page 66)

(Elements of Financial Statements) Ten interrelated elements that are most directly related to measuring the performance and financial status of an enterprise are provided below.

Assets Distributions to owners Expenses Liabilities Comprehensive Income Gains Equity Revenues Losses Investments by owners

Instructions

Identify the element or elements associated with the 12 items below.(a) Arises from peripheral or incidental transactions.

(b) Obligation to transfer resources arising from a past transaction.

(c) Increases ownership interest.

(d) Declares and pays cash dividends to owners.

(e) Increases in net assets in a period from nonowner sources.

(f) Items characterized by service potential or future economic benefit.

(g) Equals increase in assets less liabilities during the year, after adding distributions to owners and subtracting investments by owners.

(h) Arises from income statement activities that constitute the entity鈥檚 ongoing major or central operations.

(i) Residual interest in the assets of the enterprise after deducting its liabilities.

(j) Increases assets during a period through sale of product.

(k) Decreases assets during the period by purchasing the company鈥檚 own stock.(l) Includes all changes in equity during the period, except those resulting from investments by owners and distributions to owners.

Short Answer

Expert verified

a) Gains or losses, (b) Liabilities, (c) Investments by owners, comprehensive income, and also comes under revenues and gains (d) Distribution to owners (e) Comprehensive income and also gains and revenues (f) Assets (g) Comprehensive Income (h) Revenues, expenses (i) Equity (j) Revenues (k) Distribution to owners (l) Comprehensive Income

Step by step solution

01

(a) Transactions that are related to peripheral or incidental  – Gains or losses

Gains or losses 鈥� The arises from peripheral or incidental transactions are associated with gains or losses element.

02

(b) Transactions that are related to the obligation to transfer resources arising from a past transaction – Liability

Liability 鈥揟he obligation to transfer resources arising from a past transaction is associated with the liability element.

03

(c) Transactions related to Increases ownership interest –  Investments by owners, comprehensive income, and also comes under revenues and gains

Investment by owners 鈥� The increases in ownership interest are associated with Investment by owners, Comprehensive income, and Gains or losses.

04

(d) Transaction related to declaring and paying cash dividends to owners  –  Distribution to owners

Distribution to owners 鈥� Declares and paying cash dividends to owners are associated with the liability element.

05

(e) Transaction related to Increases in net assets in a period from non-owner resources –  Comprehensive income and also gains and revenues

Comprehensive income 鈥揟he Increase in net assets in a period from non-owner resources is associated with the comprehensive income as well as gains and revenues.

06

(f) Transaction related to Items characterized by service potential –   Assets

Assets 鈥� Items characterized by service potential are associated with the liability element.

07

(g) Transaction related to Equals increase in assets fewer liabilities during the year, after adding distributions to owners and subtracting investments by owners – Comprehensive Income

Comprehensive income 鈥� Equals increase in assets and fewer liabilities during the year, after adding distributions to owners and subtracting investments by owners is associated with comprehensive income.

08

(h) Transactions Arising from income statement activities that constitute the entity's ongoing major or central operations – Revenues, expenses

Revenues or expenses 鈥� Transactions Arising from income statement activities that constitute the entity's ongoing major It is associated with the revenues or expenses element.

09

(i) Transaction relating to Residual interest in the assets of the enterprise after deducting its liabilities – Equity

Equity 鈥� Residual interest in the assets of the enterprise after deducting its liabilities is associated with the equity element.

10

(j) Transactions related to Increased assets during a period through the sale of Product – Revenues

Revenues 鈥� Increased assets during a period through the sale of Products are associated with the revenue element.

11

(k) Transaction relating to Decreases assets during the period by purchasing the company's stock – Distribution to owners

Distribution to owners 鈥� Decreases assets during the period by purchasing the company's stock is associated with the distribution to owners element.

12

(l) Transactions relating to including all changes in equity during the period, except those resulting from investments by owners and distributions to owners – Comprehensive Income

Comprehensive income 鈥� includes all changes in equity during the period, except those resulting from investments by owners, and distributions to owners are associated with the comprehensive income element.

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Most popular questions from this chapter

Describe the basic assumptions of accounting.

Question: What are some of the costs of providing accounting information? What are some of the benefits of accounting information? Describe the cost-benefit factors that should be considered when new accounting standards are being proposed.

How is materiality (or immateriality) related to the proper presentation of financial statements? What factors and measures should be considered in assessing the materiality of a misstatement in the presentation of a financial statement?

(Revenue Recognition Principle) After the presentation of your report on the examination of the financial statements to the board of directors of Piper Publishing Company, one of the new directors expresses surprise that the income statement assumes that an equal proportion of the revenue is recognized with the publication of every issue of the company's magazine. She feels that the 鈥渃rucial event鈥� in the process of earning revenue in the magazine business is the cash sale of the subscription. She says that she does not understand why most of the revenue cannot be 鈥渞ecognized" in the period of the cash sale. Instructions

Discuss the propriety of timing the recognition of revenue in Piper Publishing Company's accounts with:

(a) The cash sale of the magazine subscription.

(b) The publication of the magazine every month.

(c) Over time, as the magazines are published and delivered to customers.

Question: (Qualitative Characteristics) Recently, your uncle, Carlos Beltran, who knows that you always have your eye out for a profitable investment, has discussed the possibility of your purchasing some corporate bonds. He suggests that you may wish to get in on the 鈥済round floor鈥� of this deal. The bonds being issued by Neville Corp. are 10-year debentures which promise a 40% rate of return. Neville manufactures novelty/party items.

You have told Uncle Carlos that, unless you can take a look at Neville鈥檚 financial statements, you would not feel comfortable about such an investment. Believing that this is the chance of a lifetime, Uncle Carlos has procured a copy of Neville鈥檚 most recent, unaudited financial statements which are a year old. These statements were prepared by Mrs. Andy Neville. You peruse these statements, and they are quite impressive. The balance sheet showed a debt-to-equity ratio of 0.10 and, for the year shown, the company reported net income of $2,424,240.

The financial statements are not shown in comparison with amounts from other years. In addition, no significant note disclosures about inventory valuation, depreciation methods, loan agreements, etc. are available.

Instructions

Write a letter to Uncle Carlos explaining why it would be unwise to base an investment decision on the financial statements that he has provided to you. Be sure to explain why these financial statements are neither relevant nor representationally faithful.
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