Question

Question: For each item below, indicate to which category of elements of financial statements it belongs.

(a) Retained earnings (f) Loss on sale of equipment

(b) Sales (g) Interest payable

(c) Additional paid-in capital (h) Dividends

(d) Inventory (i) Gain on sale of investment

(e) Depreciation (j) Issuance of common stock

Short answer

The category to which the elements of financial statements belong are:

1. Retained earnings belongs to equity.

2. Sales belong to revenues.

3. Additional paid-in capital belongs to equity.

4. Inventory belongs to assets.

5. Depreciation belongs to expenses.

6. Loss on sale of equipment belongs to losses.

7. Interest payable belongs to liabilities.

8. Dividends belong to distribution to owners.

9. Gain on sale of investment belong to gains.

10. Issuance of common stock belongs to investment by owners.

Step-by-step solution

Meaning of financial statements

Financial statements are official records of the accounting activities and status of firms, person or other organization.

Retained earnings

Retained earnings are the remaining amount of profit left behind with the firm but the disbursement of all its income taxes, direct and indirect costs and its dividends to shareholders. This shows the part of the firm’s equity that can be used.

Sales

Sales are defined as the firm’s revenue obtained from the sale of products or services. Net sales are also regarded as revenues they are listed directly on the income statement as sales or net sales.

Additional paid-in capital

Additional paid-in capital is the variation between the face amount of a stock and the actual price paid for it by the investors. The additional paid-in capital is usually recorded as equity of the shareholders on the balance sheet.

Inventory

Inventory is regarded as the raw materials used for generating goods ang goods that are brought out for the purpose of sale. It is grouped as current asset on the balance sheet of the firm.

Depreciation

Depreciation is an accounting process that extends the cost of an asset over its estimated useful life. Firms list depreciation as a periodic expense on the income statement. Assets depreciate their amount as they degrade over time.

Loss on sale of equipment

Loss on sale of equipment is regarded as an expense account. It is grouped under non-operating loss in the income statement.

Interest payable

Interest payable is the value that a person or firm owes to a lender at a specific time but is yet to pay. It assists firms to keep record of their liabilities in their balance sheet as well as prepare their financial statements.

Dividends

Dividends are considered as a distribution made to the owners that is related to the number of shares owned. A dividend is not regarded as an expense for the disbursing firm, instead it is denoted as a distribution of its retained earnings.

Gain on sale of investment

The value by which the profits from the sale of investments becomes greater than the book value of the investments that were sold. It is listed as a non-operating income on a profit and loss statement.

Issuance of common stock

The common stock is basically listed at its market value, which is normally the value of profits obtained. Those profits are assigned first to the face value of the shares (if any), with any excess over face value assigned to additional paid-in capital. Common stock is listed in the investor’s equity portion of the balance sheet.