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Chapter 2: Question 11Q (page 61)

Revenues, gains, and investments by owners are all increasing in net assets. What are the distinctions among them?

Short Answer

Expert verified

Investments by owners are different from revenues and gains in that they indicate the transfer made by owners to the organization, and they do not arise from the activities done for the purpose of producing income. Revenues differ from gains as revenues arise from the ongoing operations of the business and gains arise from accidental transactions.

Step by step solution

01

Definition of Net Assets

Net assets are the assets obtained after deducting the company’s liabilities from its assets. Net assets are calculated by adding total current liabilities and total long-term liabilities and equities and deducting them from the addition of total fixed assets and total current assets.

02

Difference between revenues, gains, and investments by owners

Revenue arises in the ordinary course of business activities of an enterprise from the sale of goods, rendering of services, and use by others of enterprise resources yielding interest, royalties, and dividends. A gain is an increase in equity resulting from accidental transactions of an organization and from all other transactions and other events. Investment by owners refers to an increase in net assets of a specific certain enterprise arising from transfers made to it from other organizations of something of value to obtain or increase its ownership interests.

Revenue is obtained from the selling of goods or producing a service. A gain results from an increase in a non-operating activity. On the other hand, investment by owners occurs by an increase in net assets that were provided to the company from the owners.

Therefore, revenue, gains, and investments by owners differ from each other, though they result in an overall increase in net assets.

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Most popular questions from this chapter

Question: Briefly describe the types of information concerning financial position, income, and cash flows that might be provided (a) within the main body of the financial statements, (b) in the notes to the financial statements, or (c) as supplementary information.

Match the qualitative characteristics below with the following statements.1. Timeliness 5. Faithful representation2. Completeness 6. Relevance3. Free from error 7. Neutrality4. Understandability 8. Confirmatory value

  1. Quality of information that assures users that information represents the economic phenomena that it purports to represent.
  2. Information about an economic phenomenon that corrects past or present expectations based on previous evaluations.
  3. The extent to which information is accurate in representing the economic substance of a transaction.
  4. Includes all the information that is necessary for a faithful representation of the economic phenomena that it purports to represent.
  5. Quality of information that allows users to comprehend its meaning.

E2-7 (L05,6) (Assumptions, Principles, and Constraint) Presented below are a number of operational guidelines and practices that have developed over time.

Instructions

Select the assumption, principle, or constraint that most appropriately justifies these procedures and practices. (Do not use qualitative characteristics.)

  1. Fair value changes are not recognized in the accounting records.
  2. Financial information is presented so that investors will not be misled.
  3. Intangible assets are amortized over periods benefited.
  4. Agricultural companies use fair value for purposes of valuing crops.
  5. Each enterprise is kept as a unit distinct from its owner or owners.
  6. All significant post-balance-sheet events are disclosed.
  7. Revenue is recorded when the product is delivered.
  8. All important aspects of bond indentures are presented in financial statements.
  9. Rationale for accrual accounting.
  10. The use of consolidated statements is justified.
  11. Reporting must be done at defined time intervals.
  12. An allowance for doubtful accounts is established.
  13. Goodwill is recorded only at time of purchase.
  14. A company charges its sales commission costs to expense

(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.

Briefly describe the two fundamental qualities of useful accounting information.
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