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Elements of Financial Statements

The document discusses key elements of financial statements including assets, liabilities, income, and expenses. It provides definitions and examples of each element. It also discusses principles of revenue and expense recognition, such as cause and effect association, systematic allocation, and immediate recognition. The document outlines different bases for measuring financial statement elements, such as historical cost, current cost, and present value. It concludes by defining capital maintenance approaches.

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Jonathan Navallo
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58 views2 pages

Elements of Financial Statements

The document discusses key elements of financial statements including assets, liabilities, income, and expenses. It provides definitions and examples of each element. It also discusses principles of revenue and expense recognition, such as cause and effect association, systematic allocation, and immediate recognition. The document outlines different bases for measuring financial statement elements, such as historical cost, current cost, and present value. It concludes by defining capital maintenance approaches.

Uploaded by

Jonathan Navallo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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a) Cause & Effect Association – upon

CHAPTER 4: recognition of revenue (ex. sale of


ELEMENTS OF FINANCIAL merchandise)
b) Systematic & Rational Allocation –
STATEMENTS allocating expense over periods (ex.
Quantitative information/building blocks of depreciation)
financial statements… c) Immediate Recognition – because of
no future benefit/relation to revenue (ex.
1. ASSETS – economic resources with losses)
probable future benefits.
5. EQUITY
Cost Principle – assets to be recorded at
original acquisition cost

MEASUREMENT OF ELEMENTS
2. LIABILITIES – present obligations resulting 1. HISTORICAL COST - past purchase
to an outflow from resources when settled exchange price; most common

Legal – from a binding contract or requirement 2. CURRENT COST - current purchase


(ex. Accounts payable for service rendered) exchange price
Constructive – out of conduct or desire to 3. REALIZABLE VALUE - current sale
maintain good business relations exchange price
4. PRESENT VALUE – future exchange price;
discounted value of the future cash the item is
3. INCOME – increase in economic benefit in
expected to generate
the form of inflows
Revenue – from regular activities (ex. sales,
fees)
CAPITAL MAINTENANCE
Gains – ex. from disposal of noncurrent assets Determines financial performance; net income
occurs only after beginning capital is
“Income shall be recognized when earned” maintained
*point of sale is the point of income recognition
except on the ff. methods: 1. FINANCIAL CAPITAL – absolute
monetary amount of net assets; historical
a) Installment – at point of collection cost
b) Cost Recovery/Sunk Cost – at point of
collection 2. PHYSICAL CAPITAL – quantitative
c) Cash – when payment is received measure of productive capacity to produce
d) Percentage of Completion – by goods and services; current cost
reference to stage of completion of the
contract activity
e) Production – at point of production

4. EXPENSE - decrease in economic benefit in


the form of outflows
Expenses – from regular activities (ex. cost of
sales, wages, etc.)
Losses – ex. resulting from disasters, etc.
“Expenses are recognized when incurred”
Matching Principle – expenses incurred in
earning revenue are reported in the same
period

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