Question

Statements of Financial Accounting Concepts set forth financial accounting and reporting objectives and fundamentals that will be used by the Financial Accounting Standards Board in developing standards. Concepts Statement No. 6 defines various elements of financial statements.

Instructions

Answer the following questions based on SFAC No. 6.

1. Define and discuss the term “equity.”
2. What transactions or events change owners’ equity?
3. Define “investments by owners” and provide examples of this type of transaction. What financial statement element other than equity is typically affected by owner investments?
4. Define “distributions to owners” and provide examples of this type of transaction. What financial statement element other than equity is typically affected by distributions?
5. What are examples of changes within owners’ equity that do not change the total amount of owners’ equity?

Short answer

Based on SFAC No 6, it provides a five-part theory case on equity based on Financial Statements of Financial Accounting.

Step-by-step solution

Meaning of Financial Accounting concept

Financial accounting is a particular department of bookkeeping which includes a handle of recording, summarizing, and announcing the heap of exchangescoming about from commerce operations over a period of time.

Discussing the term Equity

Equity is meant for future benefits which cannot be emulated to persuade current commitment. Resources are future financial benefits likely to be controlled by a particular substance as a result of past exchanges or opportunities; and liabilities are potential future sacrifices of financial benefits arising from a performance commitment of a particular substance as a result of past exchanges or opportunities.

Explaining the transaction or events change owners’ equity

Transaction or events are events that alter value incorporate incomes and costs, picks up and losses, investment by proprietors, and dispersion to owners.

Defining investments by owners

Investments by proprietors are the increment in net resources coming about from exchange by other substances of something of esteem to get proprietorship. Examples of speculation by proprietors are issuing preferred or common stock conversions of convertible bonds, issuing Treasury stock valuations on stocks and issuing stock warrants. For the most part, speculation by owners causes an increase in resources in an extension to an increase in value.

Defining Distribution to owners

Distribution to owners is an exchange of resources for ownership, providing administration for the owners,or liabilities to the owners, there may be a reduction in the net resources.

Examples of conveyance to proprietors are cash or property profits and the buy of treasury stock. Broadly speaking, profit at first causes an increase in liabilities but in the long run, the reduction in resources leads to a reduction in value to the extent. A reduction in the purchase price of Treasury stock reduces resources in expansion.

Discussing examples of changes within owners’ equity that do not change the total amount of owners’ equity

A few examples of changes within equity that don't alter the entire sum of owners' value are retirement of treasury stock, quasi-reorganization (except revaluing of assets) conversion of favored stock into common stock, stock profits, and held profit apportionments.