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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

(Assumptions, Principles, and Constraint) Presented below are the assumptions, principles, and constraints used in this chapter.

1. Economic entity assumption 6. Measurement principle (fair value)2. Going concern assumption 7. Expense recognition principle3. Monetary unit assumption 8. Full disclosure principle4. Periodicity assumption 9. Cost constraint5. Measurement principle (historical cost) 10. Revenue recognition principle

Instructions

Identify by number the accounting assumption, principle, or constraint that describes each situation below. Do not use a number more than once

.(a) Allocates expenses to revenues in the proper period.

(b) Indicates that fair value changes subsequent to purchase are not recorded in the accounts. (Do not use revenue recognition principle.)

(c) Ensures that all relevant financial information is reported.

(d) Rationale why plant assets are not reported at liquidation value. (Do not use historical cost principle.)

(e) Indicates that personal and business record keeping should be separately maintained.(f) Separates financial information into time periods for reporting purposes.

(g) Assumes that the dollar is the 鈥渕easuring stick鈥� used to report on financial performance.

(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: The AICPA Special Committee on Financial Reporting proposed the following constraints related to financial reporting.

  1. Business reporting should exclude information outside of management鈥檚 expertise or for which management is not the best source, such as information about competitors.

  2. Management should not be required to report information that would significantly harm the company鈥檚 competitive position.

  3. Management should not be required to provide forecasted financial statements. Rather, management should provide information that helps users forecast themselves the company鈥檚 financial future.

  4. Other than for financial statements, management need report only the information it knows. That is, management should be under no obligation to gather information it does not have, or does not need, to manage the business.

  5. Companies should present certain elements of business reporting only if users and management agree they should be reported- a concept of flexible reporting.

  6. Companies should not have to report forward-looking information unless there are effective deterrents to unwarranted litigation that discourages companies from doing so.

Instructions

For each item, briefly discuss how the proposed constraint addresses concerns about the costs and benefits of financial reporting.

BE2-10 (L06) Identify which basic principle of accounting is best described in each item below.

  1. Norfolk Southern Corporation reports revenue in its income statement when the performance obligation is satisfied instead of when the cash is collected.
  2. Yahoo! recognizes depreciation expense for a machine over the 2-year period during which that machine helps the company earn revenue.
  3. Oracle Corporation reports information about pending lawsuits in the notes to its financial statements.
  4. Gap, Inc. reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair value is greater.

(Full Disclosure Principle) Presented below are a number of facts related to Weller, Inc. Assume that no mentionof these facts was made in the financial statements and the related notes.

Instructions

Assume that you are the auditor of Weller, Inc. and that you have been asked to explain the appropriate accounting and related disclosure necessary for each of these items.

(a) The company decided that, for the sake of conciseness, only net income should be reported on the income statement. Details as to revenues, cost of goods sold, and expenses were omitted.

(b) Equipment purchases of \(170,000 were partly financed during the year through the issuance of a \)110,000 notes payable. The company offset the equipment against the notes payable and reported plant assets at \(60,000.

(c) Weller has reported its ending inventory at \)2,100,000 in the financial statements. No other information related to inventories is presented in the financial statements and related notes.

(d) The company changed its method of valuing inventories from weighted-average to FIFO. No mention of this change was made in the financial statements.
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