Knowledge Booster Show  Learn more about Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below. Recommended textbooks for you FINANCIAL ACCOUNTING ISBN:9781259964947 Author:Libby Publisher:MCG Accounting ISBN:9781337272094 Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E. Publisher:Cengage Learning, Accounting Information Systems ISBN:9781337619202 Author:Hall, James A. Publisher:Cengage Learning, Horngren's Cost Accounting: A Managerial Emphasis... ISBN:9780134475585 Author:Srikant M. Datar, Madhav V. Rajan Publisher:PEARSON Intermediate Accounting ISBN:9781259722660 Author:J. David Spiceland, Mark W. Nelson, Wayne M Thomas Publisher:McGraw-Hill Education Financial and Managerial Accounting ISBN:9781259726705 Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles Publisher:McGraw-Hill Education FINANCIAL ACCOUNTING ISBN:9781259964947 Author:Libby Publisher:MCG Accounting ISBN:9781337272094 Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E. Publisher:Cengage Learning, Accounting Information Systems ISBN:9781337619202 Author:Hall, James A. Publisher:Cengage Learning, Horngren's Cost Accounting: A Managerial Emphasis... ISBN:9780134475585 Author:Srikant M. Datar, Madhav V. Rajan Publisher:PEARSON Intermediate Accounting ISBN:9781259722660 Author:J. David Spiceland, Mark W. Nelson, Wayne M Thomas Publisher:McGraw-Hill Education Financial and Managerial Accounting ISBN:9781259726705 Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles Publisher:McGraw-Hill Education lLO6 The 10 elements are: (1) assets, (2) liabilities, (3) equity, (4) investments by owners, (5) distributions to owners, (6) revenues, (7) expenses, (8) gains, (9) losses, and (10) comprehensive income. The 10 elements of financial statements defined in SFAC 6 describe financial position and periodic performance. You probably already know in general terms what most of these elements mean. But as you will see when they are discussed, it is helpful to have a deeper understanding of their meaning. You may recognize the first three elements—assets, liabilities, and equity—as those that portray the financial position of an enterprise.
Assets represent probable future economic benefits controlled by the enterprise. A key characteristic of this definition is that an asset represents probable future economic benefits. A receivable is an asset only if it is probable that future benefits will result, that cash will be collected. The controlled by aspect of the definition also is important. The employees of a company certainly represent future economic benefits to a company. However, they are not owned or controlled by the company and do not qualify as assets.
Liabilities represent obligations to other entities. Most liabilities require the future payment of cash, the amount and timing of which are specified by a legally enforceable contract. Actually, though, a liability need not be payable in cash. Instead, it may require the company to transfer other assets or to provide services. For example, a warranty liability is created for the seller when a product is sold and the seller guarantees to fix or replace the product if it proves defective and it is probable that a material amount of product sold will, in fact, prove defective. A liability also need not be represented by a written agreement, nor be legally enforceable. For example, a company might choose to pay a terminated employee’s salary for a period of time after termination even though not legally required to do so. The commitment creates a liability at the date of termination.
Assets and liabilities are measured directly; equity is not. Equity is simply a residual amount. The accounting equation illustrates financial position. Equity is a residual amount, the owners’ interest in assets after subtracting liabilities. For a corporation, equity arises primarily from two sources: (1) amounts invested by shareholders in the corporation and (2) amounts earned by the corporation on behalf of its shareholders. These two sources are reported as (1) paid-in capitalinvested capital consisting primarily of amounts invested by shareholders when they purchase shares of stock from the corporation. and (2) retained earningsamounts earned by the corporation on behalf of its shareholders and not (yet) distributed to them as dividends.. We discuss this classification of shareholders’ equity in more depth in Chapter 18. The next two elements defined in SFAC 6 deal with changes in equity from owner transactions.
Investments by owners and distributions to owners are transactions describing any owner contribution to and withdrawal from the company. A corporation’s issuance of ownership shares of stock in exchange for cash represents an investment by owners.
A cash dividend paid by a corporation to its shareholders is the most common distribution to owners. Revenues, gains, expenses, and losses describe changes in equity due to profit-generating transactions.
A key characteristic is that revenues are inflows. The enterprise is acquiring something in exchange for providing goods and services to customers. Also, providing these goods and services represents a major operation of the enterprise. Revenues are gross inflows resulting from providing goods or services to customers. On the other hand, if selling the item is not part of the central operations of the business but instead is only an incidental result of those operations, the inflow of assets would produce a gain rather than a revenue.
FedEx earns revenue by providing a service, delivering packages, to its customers. If FedEx sold a piece of machinery used to deliver packages for an amount greater than its book value (original cost less depreciation recorded up to the date of sale), a gain would result. Gains are net inflows, the difference between the amount received and book value. Revenues are gross inflows, measured as the amount received or to be received for the goods or services without regard to the cost of providing the goods or services.
Expenses are gross outflows incurred in generating revenues. A key characteristic is that expenses represent outflows of resources incurred in the process of generating revenues.
If FedEx sold that piece of machinery used to deliver packages for less than its book value, a loss would result. So, losses are the opposite of gains—they are net outflows rather than net inflows. They differ from expenses by being net rather than gross outflows and by being peripheral, or incidental, transactions rather than major, or central, operations. Revenues plus gains less expenses and losses for a period equals net incomeincome statement bottom line. or net lossincome statement bottom line., the so-called bottom line of the income statement.36 You should note that the definitions of these nine elements are in basic agreement with those used in practice. But, SFAC 6 also introduced a new term, the 10th element, called comprehensive income.
Comprehensive income often does not equal net income. Under present GAAP, net income as reported in the income statement often doesn’t equal comprehensive income. The difference is the treatment of certain changes in assets and liabilities not included in the determination of net income for the period in which they are recognized but instead reported collectively as a separate component of shareholders’ equity in the balance sheet called accumulated other comprehensive income. For example, in your study of investments in Chapter 12, you will learn that for certain types of investments valued at fair values in the balance sheet, the changes in those values are not included in net income but rather in a separate component of shareholders’ equity. Comprehensive income is discussed in Chapter 4. In the FedEx Corporation financial statements in Appendix B, the income statement for the most recent fiscal year reports net income of $838 million. The balance sheet for the most recent fiscal year shows accumulated other comprehensive income of $(46 million), and the statement of changes in stockholders’ investment and comprehensive income provides the details of the change in this figure from the prior year. FedEx Corporation Brief-Exercises BE1-3, BE1-4, BE1-5, BE1-6 Exercises E1-5, E1-6, E1-7, E1-8, E1-9, E1-11, E1-12, E1-13, E1-14 Communication Case 1-5 Judgment Case 1-8, 1-9, 1-10 Real World Case 1-13 33 “Elements of Financial Statements,” Statement of Financial Accounting Concepts No. 6 (Stamford, Conn.: FASB, 1985), par. 5. 34Graphic 1-6. 35 In 2000, the FASB issued an exposure draft proposing a revision to the Concept Statement No. 6 definition of a liability. The proposed amendment would expand the definition to also include as liabilities certain obligations that require or permit settlement by issuance of the issuer’s equity shares and that do not establish an ownership interest. At the time this text was written, a final pronouncement had not been issued. 36 Some companies use the term net earnings instead of net income. If earnings are negative, the term used is net loss. How would a decrease in net assets arising from a peripheral or incidental transaction be classified?c. Yes, a decrease in the net assets that arises or occurs because of peripheral or incidental transactions is called a loss.
Which basic element of financial statements arises from peripheral or incidental transactions?Gain is the result of the sale of fixed assets, and selling the fixed asset is not the regular transaction of the business organization. Therefore, the gain is the element of financial statement arising from peripheral or incidental transactions.
What are incidental transactions?Incidental expenses, also known as incidentals, are gratuities and other minor fees or costs incurred in addition to the main service, item, or event paid for during business activities. Incidental expenses ancillary to the costs of transportation, meals, and lodging are common when an employee travels for business.
What is a peripheral transaction in accounting?Also referred to as peripheral activities. A company's activities outside of its main activities of buying/producing and selling.
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