Analyze the relationships betw
Analyze the relationships between these elements below:
— Assets are probable future economic benefits obtained orcontrolled by a particular entity as a result of past transactionsor events.
— Liabilities are probable future sacrifices of economicbenefits arising from present obligations of a particular entity totransfer assets or provide services to other entities in the futureas a result of past transactions or events.
— Equity or net assets is the residual interest in the assets ofan entity that remains after deducting its liabilities. In abusiness enterprise, the equity is the ownership interest. In anot-for-profit organization, which has no ownership interest in thesame sense as a business enterprise, net assets is divided intothree classes based on the presence or absence of donor-imposedrestrictions—permanently restricted, temporarily restricted, andunrestricted net assets.
— Investments by owners are increases in equity of a particularbusiness enterprise resulting from transfers to it from otherentities of something valuable to obtain or increase ownershipinterests (or equity) in it. Assets are most commonly received asinvestments by owners, but that which is received may also includeservices or satisfaction or conversion of liabilities of theenterprise.
— Distributions to owners are decreases in equity of aparticular business enterprise resulting from transferring assets,rendering services, or incurring liabilities by the enterprise toowners. Distributions to owners decrease ownership interest (orequity) in an enterprise.
— Comprehensive income is the change in equity of a businessenterprise during a period from transactions and other events andcircumstances from no owner sources. It includes all changes inequity during a period except those resulting from investments byowners and distributions to owners.
— Revenues are inflows or other enhancements of assets of anentity or settlements of its liabilities (or a combination of both)from delivering or producing goods, rendering services, or otheractivities that constitute the entity’s ongoing major or centraloperations.
— Expenses are outflows or other using up of assets orincurrences of liabilities (or a combination of both) fromdelivering or producing goods, rendering services, or carrying outother activities that constitute the entity’s ongoing major orcentral operations.
— Gains are increases in equity (net assets) from peripheral orincidental transactions of an entity and from all othertransactions and other events and circumstances affecting theentity except those that result from revenues or investments byowners.
— Losses are decreases in equity (net assets) from peripheral orincidental transactions of an entity and from all othertransactions and other events and circumstances affecting theentity except those that result from expenses or distributions toowners
Answering the following questions:
- How are the 10 financial statement elements related to oneanother? How do they differ?
- Identify where each of these elements are reported in thefinancial statements.
Answer:
1- How are 10 financial statement elements related toone another ?
Items reported on the financial statements are organized intoclasses or categories called elements. The ten elements offinancial statements are:1. Assets2. Liabilities3. Equity (Stockholders’ Equity)4. Investments by Owners (Contributed Capital)5. Revenue6. Expenses7. Distributions (Dividends)8. Net Income9. Gains10. Losses
Financial statements are all interrelated because they presentthe different aspects of the same business transactions.
The balance sheet reports the assets, liabilities, and equity ofa business at a specific moment. Other financial statements reportthe changes in the various elements of a balance sheet over anaccounting period.
The balance sheet stores the cumulative effect of all accountingtransactions since the commencement of business. But what makes thebalance sheet unique from other types of financial statements isthat it reports the accounting information for a specific point intime (i.e., day) rather than a period.
three periodic financial statements include the cash flowstatement, the income statement, and the statement of changes inequity. These reports provide information about the changes in thevarious elements of a balance sheet over an accounting period:
- The cash flow statement tracks the movement of money reportedin the balance sheet.
- The income statement provides a detailed account of the changeto equity caused by a business’s operating activities during anaccounting period.
- Statement of changes in equity tracks the investments made bythe business owners as well as any distributions made to themduring an accounting period such as dividends.
The information contained in the periodic financial statementsis supplemental to the information contained in the balance sheet,so it is reasonable to expect some interconnection betweenthem.
The following diagram gives a bird’s eye view
2_. How do they differ ? financial statementsto monitor performance, identify problems in the early stages andjustify financing, as well as many other functions. Despite thedifferences among the statements, they are interconnected andtogether illustrate the company’s financial position, dailyoperations and projected stability. Understanding how each of thecommon financial statements works will help you prepare youraccounting statements accurately at the end of the period.
Balance Sheet
The balance sheet lists the assets a company has, includingequipment, property and intellectual property. Also included in abalance sheet are liabilities, including immediate expenses,short-term and long-term debt. The final section of a balance sheetincludes shareholders’ equity or net worth. This section equals thedifference between the assets and the liabilities, which indicateshow much money the business would have in the event of a totalasset liquidation and settlement of liability accounts. Balancesheets reflect the information as of a specific date as stcomeStatement.
The income statement illustrates the amount of money a businessearned within a specified time span, such as a fiscal quarter or afiscal year. The income sources include sales revenue, interest andsale of property. The income statement includes the expenses thatdirectly relate to the income for that period. The expenses listedon an income statement include employee salaries, overhead expensesand administrative costs. The difference between the two ishighlighted as net income. If the business has shareholders, anearnings per share line is included based on the net incomefigures.
Retained Earnings
Retained earnings represent the amount of money the businessholds after issuing dividends to stockholders. The retainedearnings statement illustrates the current retained earningsaccount balance, the net profit or loss from the income statementand any dividends issued. The balance after accounting for thesefactors is the final retained earnings for the accounting andreporting period.
Cash Flow
The cash flow statement illustrates where the company’s cash isdistributed. The first section shows the cash activity fromoperating expenses, such as revenue from sales, salary expenses andadministrative costs. The next sections detail any investments ordividends during the period. The final calculations reflect thedecrease in overall cash from the previous period to the currentstatement.
3_ Identify where each of these elements are reported inone financial statements ?
Of these elements, assets, liabilities, andequity are included in the balancesheet. Revenues and expenses are includedin the income statement. Changes in theseelements are noted in thestatement of cash flows.
the revenue reported on the income statement may not have beencollected or expenses may not have been paid. That’s where a cashflow statement comes in. Unlike the accrual-based income statement,a cash flow statement focuses only on money changing hands. Forinstance, customer payments affect cash flow, and conversely,accounts receivable doesn’t. One way to create the cash flowstatement is to take the income statement and eliminate anyrevenues you have not collected and expenses you have not paid. Ifyou’re running your business using cash accounting, you don’t needa separate cash flow statement.
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