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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

E2-3 (L03,7) GROUPWORK (Qualitative Characteristics) SFAC No. 8 identifies the qualitative characteristics that make accounting information useful. Presented below are a number of questions related to these qualitative characteristics and underlying constraint.

(a) What is the quality of information that enables users to confirm or correct prior expectations?

(b) Identify the pervasive constraint developed in the conceptual framework.

(c) The chairman of the SEC at one time noted, 鈥淚f it becomes accepted or expected that accounting principles are determined or modified in order to secure purposes other than economic measurement, we assume a grave risk that confidence in the credibility of our financial information system will be undermined.鈥� Which qualitative characteristic of accounting information should ensure that such a situation will not occur? (Do not use faithful representation.)

(d) Muruyama Corp. switches from FIFO to average-cost to FIFO over a 2-year period. Which qualitative characteristic of accounting information is not followed?

(e) Assume that the profession permits the savings and loan industry to defer losses on investments it sells because immediate recognition of the loss may have adverse economic consequences on the industry. Which qualitative characteristic of accounting information is not followed? (Do not use relevance or faithful representation.)

(f) What are the two fundamental qualities that make accounting information useful for decision-making?

(g) Watteau Inc. does not issue its first-quarter report until after the second quarter鈥檚 results are reported. Which qualitative characteristic of accounting is not followed? (Do not use relevance.)

(h) Predictive value is an ingredient of which of the two fundamental qualities that make accounting information useful for decision-making purposes?

(i) Duggan, Inc. is the only company in its industry to depreciate its plant assets on a straight-line basis. Which qualitative characteristic of accounting information may not be followed?

(j) Roddick Company has attempted to determine the replacement cost of its inventory. Three different appraisers arrive at substantially different amounts for this value. The president, nevertheless, decides to report the middle value for external reporting purposes. Which qualitative characteristic of information is lacking in these data? (Do not use relevance or faithful representation.)

Question: Briefly describe the types of information concerning financial position, income, and cash flows that might be provided (a) within the main body of the financial statements, (b) in the notes to the financial statements, or (c) as supplementary information.

Expenses, losses, and distributions to owners are all decreases in net assets. What are the distinctions among them?

The Financial Accounting Standards Board (FASB) has developed a conceptual framework for financial accounting and reporting. The FASB has issued eight Statements of Financial Accounting Concepts. These statements are intended to set forth the objective and fundamentals that will be the basis for developing financial accounting and reporting standards. The objective identifies the goals and purposes of financial reporting. The fundamentals are the underlying concepts of financial accounting that guide the selection of transactions, events, and circumstances to be accounted for; their recognition and measurement; and the means of summarizing and communicating them to interested parties.

The purpose of the statement on qualitative characteristics is to examine the characteristics that make accounting information useful. These characteristics or qualities of information are the ingredients that make information useful and the qualities to be sought when accounting choices are made.

Instructions

(a) Identify and discuss the benefits that can be expected to be derived from the FASB鈥檚 conceptual framework.

(b) What is the most important quality for accounting information as identified in the conceptual framework? Explain why it is the most important.

(c) Statement of Financial Accounting Concepts No.8 describes a number of key characteristics or qualities for accounting information. Briefly discuss the importance of any three of these qualities for financial reporting purposes.

Homer Winslow and Jane Alexander are discussing various aspects of the FASB鈥檚 concepts statement on the objective of financial reporting. Homer indicates that this pronouncement provides little, if any, guidance to the practicing professional in resolving accounting controversies. He believes that the statement provides such broad guidelines that it would be impossible to apply the objective to present-day reporting problems. Jane concedes this point but indicates that the objective is still needed to provide a starting point for the FASB in helping to improve financial reporting.Instructions

  1. Indicate the basic objective established in the conceptual framework.
  2. What do you think is the meaning of Jane鈥檚 statement that the FASB needs a starting point to resolve accounting controversies?
See all solutions

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