Chapter 5 – Elements of Financial Statements

1. Define elements of financial statements.

- The elements of financial statements are the general groupings of line items contained
within the statements. These groupings will vary, depending on the structure of the
business. Thus, the elements of the financial statements of a for-profit business vary
somewhat from those incorporated into a nonprofit business.
2. What are the elements directly related to the measurement of financial position?
- The elements directly related to the measurement of financial position are assets, liabilities,
and equity.
3. What are the elements directly related to the measurement of financial performance?
- The elements directly related to the measurement of financial performance include income
and expense.
4. Define an asset.
- Assets are the items your company owns that can provide future economic benefit. Assets
add value to your company and increase your company's equity.
5. What are the essential characteristics of an asset?
- The essential characteristics of an asset include: (1) the asset is a present economic
resource, (2) the economic resource is a right that has the potential to produce economic
benefits, and (3) the economic resource is controlled by the entity as a result of past events.
6. Explain a right to produce economic benefit.
- Previously an asset was defined as ‘a resource controlled by the entity as a result of past
events and from which economic benefits are expected to flow to the entity’. The right to
produce economic benefits now means that the flow of economic benefits no longer needs
to be certain, or even likely . All that is required is one circumstance in which it would
produce economic benefits.
7. Explain control of an economic resource.
- An entity controls an economic resource if it has the present ability to direct the use of the
economic resource and obtain the economic benefits that may flow from it. It includes the
ability to prevent the usage of such asset by other parties and therefore preventing them
from obtaining the economic benefits from the asset.
8. Define liability.
- A liability is something a person or company owes, usually a sum of money. Liabilities are
settled over time through the transfer of economic benefits including money, goods, or
services. It is a present obligation of an entity to transfer economic resource as a result of
past events.
9. What are the essential characteristics of a liability?
- The essential characteristics of a liability includes: (1) the entity has an obligation which
means that the entity liable must be identified, (2) the obligation is to transfer an economic
resource, (c) the obligation is present obligation that exists as a result of past event which
means that a liability is not recognized until it is incurred.
10. Explain an obligation.
- An obligation is a commitment to pay a third party based on an underlying contract , such as
a purchase order, mortgage, or bond issuance. If the obligation is probable and the amount
can be determined, then it is recorded in an entity's accounting records as a liability.
11. Explain transfer of economic resources.
- The transfer of an economic resource embodies economic benefits that will be required to
settle the obligation, resulting in an outflow (in general of cash) from the reporting entity to
a third party.
12. Define income.
- Income is the company profit earned after operating expenses have been subtracted from
gross revenue. It is an increase in assets and decrease in liabilities that result in the increase
in equity, not including the contributions from equity holder.
13. Distinguish income from revenue.
- Revenue is the total amount of money generated by a company from selling their products
or services. Income represents the total profits, or net income, after expenses are
subtracted from revenue. This key difference means that income and revenue cannot be
substituted for one another when reporting on a business’ financials.
14. Define an expense.
- An expense is defined as an outflow of money or assets to another individual or company as
payment for an item or service. Technically speaking, an expense is incurred whenever an
asset is used up or a liability is incurred. 
15. Distinguish expenses from loss.
- The main difference between expenses and losses is that expenses are incurred in order to
generate revenues, while losses are related to essentially any other activity. Another
difference is that expenses are incurred much more frequently than losses, and in much
more transactional volume.