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Chapter 2: Question 11Q (page 61)

Revenues, gains, and investments by owners are all increasing in net assets. What are the distinctions among them?

Short Answer

Expert verified

Investments by owners are different from revenues and gains in that they indicate the transfer made by owners to the organization, and they do not arise from the activities done for the purpose of producing income. Revenues differ from gains as revenues arise from the ongoing operations of the business and gains arise from accidental transactions.

Step by step solution

01

Definition of Net Assets

Net assets are the assets obtained after deducting the company鈥檚 liabilities from its assets. Net assets are calculated by adding total current liabilities and total long-term liabilities and equities and deducting them from the addition of total fixed assets and total current assets.

02

Difference between revenues, gains, and investments by owners

Revenue arises in the ordinary course of business activities of an enterprise from the sale of goods, rendering of services, and use by others of enterprise resources yielding interest, royalties, and dividends. A gain is an increase in equity resulting from accidental transactions of an organization and from all other transactions and other events. Investment by owners refers to an increase in net assets of a specific certain enterprise arising from transfers made to it from other organizations of something of value to obtain or increase its ownership interests.

Revenue is obtained from the selling of goods or producing a service. A gain results from an increase in a non-operating activity. On the other hand, investment by owners occurs by an increase in net assets that were provided to the company from the owners.

Therefore, revenue, gains, and investments by owners differ from each other, though they result in an overall increase in net assets.

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Most popular questions from this chapter

Question: Comment on the appropriateness of the accounting procedures followed by Cramer, Inc.

a. Depreciation expense on the building for the year was \(60,000. Because the building was increasing in value during the year, the controller decided to charge the depreciation expense to retained earnings instead of to net income. The following entry is recorded.

Retained Earnings 60,000

Accumulated Depreciation鈥擝uildings 60,000

b. Materials were purchased on January 1, 2017, for \)120,000 and this amount was entered in the Materials account. On December 31, 2017, the materials would have cost \(141,000, so the following entry is made.

Inventory 21,000

Gain on Inventories 21,000

c. During the year, the company purchased equipment through the issuance of common stock. The stock had a par value of \)135,000 and a fair value of \(450,000. The fair value of the equipment was not easily determinable. The company recorded this transaction as follows.

Equipment 135,000

Common Stock 135,000

d. During the year, the company sold certain equipment for \)285,000, recognizing a gain of \(69,000. Because the controller believed that new equipment would be needed in the near future, she decided to defer the gain and amortize it over the life of any new equipment purchased.

e. An order for \)61,500 from a customer for products on hand. This order was shipped on January 9, 2018. The company made the following entry in 2017.

Accounts Receivable 61,500

Sales Revenue 61,500

Describe the basic assumptions of accounting.

According to the FASB conceptual framework, the objective of financial reporting for business enterprises is based on the needs of the users of financial statements. Explain the level of sophistication that the Board assumes about the users of financial statements.

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?

Question: What two assumptions are central to the IASB conceptual framework?
See all solutions

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