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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

Expert verified

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

01

Meaning of financial statements

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

02

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.

03

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.

04

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.

05

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.

06

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.

07

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.

08

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.

09

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.

10

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.

11

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.

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Most popular questions from this chapter

What are the four basic assumptions that underlie the financial accounting structure?

Which of the following statements about the IASB and FASB conceptual frameworks is not correct?

(a) The IASB conceptual framework does not identify the element comprehensive income.

(b) The existing IASB and FASB conceptual frameworks are organized in similar ways.

(c) The FASB and IASB agree that the objective of financial reporting is to provide useful information to investors and creditors.

(d) IFRS does not allow use of fair value as a measurement basis.

ETHICS (Expense Recognition Principle) Anderson Nuclear Power Plant will be "mothballed" at the end of its useful life (approximately 20 years) at great expense. The expense recognition principle requires that expenses be recognized as assets are used up or liabilities are incurred. Accountants Ana Alicia and Ed Bradley argue whether it is better to allocate the expense of mothballing over the next 20 years or ignore it until mothballing occurs.

Instructions

Answer the following questions.

(a) What stakeholders should be considered?

(b) What ethical issue, if any, underlies the dispute?

(c) What alternatives should be considered?

(d) Assess the consequences of the alternatives.

(e) What decision would you recommend?

(Full Disclosure Principle) Presented below are a number of facts related to Weller, Inc. Assume that no mentionof these facts was made in the financial statements and the related notes.

Instructions

Assume that you are the auditor of Weller, Inc. and that you have been asked to explain the appropriate accounting and related disclosure necessary for each of these items.

(a) The company decided that, for the sake of conciseness, only net income should be reported on the income statement. Details as to revenues, cost of goods sold, and expenses were omitted.

(b) Equipment purchases of \(170,000 were partly financed during the year through the issuance of a \)110,000 notes payable. The company offset the equipment against the notes payable and reported plant assets at \(60,000.

(c) Weller has reported its ending inventory at \)2,100,000 in the financial statements. No other information related to inventories is presented in the financial statements and related notes.

(d) The company changed its method of valuing inventories from weighted-average to FIFO. No mention of this change was made in the financial statements.

BE2-10 (L06) Identify which basic principle of accounting is best described in each item below.

  1. Norfolk Southern Corporation reports revenue in its income statement when the performance obligation is satisfied instead of when the cash is collected.
  2. Yahoo! recognizes depreciation expense for a machine over the 2-year period during which that machine helps the company earn revenue.
  3. Oracle Corporation reports information about pending lawsuits in the notes to its financial statements.
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