Chapter 4: The Elements of

Financial Statements

AGENA MARIE SAN PABLO

 Financial Statements
Financial statements portray the financial effects of
transactions and other events by grouping them into broad
classes according to their economic characteristics.
 Financial Statements
The elements of financial statements defined in the
Conceptual Framework are:
(a) assets, liabilities and equity, which relate to a reporting
entity’s financial position; and
(b) income and expenses, which relate to a reporting entity’s
financial performance.
 Asset
An asset is a present economic resource controlled by the
entity as a result of past events.

An economic resource is a right that has the potential to

produce economic benefits.
3 Aspects from the definition of an asset
1. Right
Rights that have the potential to produce economic benefits take
many forms, including:
(a) rights that correspond to an obligation of another party
(i) rights to receive cash.
(ii) rights to receive goods or services.
(iii) rights to exchange economic resources with another party on
favourable terms.
(iv) rights to benefit from an obligation of another party to
transfer an economic resource if a specified uncertain future event
occurs.
3 Aspects from the definition of an asset
1. Right
Rights that have the potential to produce economic benefits take
many forms, including:
(b) rights that do not correspond to an obligation of another party,
for example:
(i) rights over physical objects, such as property, plant and
equipment or inventories. Examples of such rights are a right to
use a physical object or a right to benefit from the residual
value of a leased object.
(ii) rights to use intellectual property.
3 Aspects from the definition of an asset
1. Right
Rights that have the potential to produce economic benefits take
many forms, including:
(b) rights that do not correspond to an obligation of another party,
for example:
(i) rights over physical objects, such as property, plant and
equipment or inventories. Examples of such rights are a right to
use a physical object or a right to benefit from the residual
value of a leased object.
(ii) rights to use intellectual property.
3 Aspects from the definition of an asset
1. Right
Rights that have the potential to produce economic benefits take
many forms, including:
(c) rights are established by contract or legislation such as owning a
debt instrument or an equity instrument or owning a registered patent.
3 Aspects from the definition of an asset
2. Potential to produce economic benefits
An economic resource is a right that has the potential to produce
economic benefits. For that potential to exist, it does not need to be
certain, or even likely, that the right will produce economic benefits. It is
only necessary that the right already exists and that, in at least one
circumstance, it would produce for the entity economic benefits beyond
those available to all other parties.
3 Aspects from the definition of an asset
2. Potential to produce economic benefits
An economic resource could produce economic benefits for an entity
by entitling or enabling it to do, for example, one or more of the
following:
(a) receive contractual cash flows or another economic resource;
(b) exchange economic resources with another party on favourable
terms;
(c) produce cash inflows or avoid cash outflows
(d) receive cash or other economic resources by selling the economic
resource; or
(e) extinguish liabilities by transferring the economic resource.
3 Aspects from the definition of an asset
2. Potential to produce economic benefits
An economic resource could produce economic benefits for an entity
by entitling or enabling it to do, for example, one or more of the
following:
(a) receive contractual cash flows or another economic resource;
(b) exchange economic resources with another party on favourable
terms;
(c) produce cash inflows or avoid cash outflows
(d) receive cash or other economic resources by selling the economic
resource; or
(e) extinguish liabilities by transferring the economic resource.
3 Aspects from the definition of an asset
3. Control
An entity controls an economic resource if it has the present ability to
direct the use of the economic resource and obtain the economic
benefits that may flow from it.

Control of an economic resource usually arises from an ability to enforce

legal rights. However, control can also arise if an entity has other means
of ensuring that it, and no other party, has the present ability to direct
the use of the economic resource and obtain the benefits that may flow
from it.
 Liability
A liability is a present obligation of the entity to transfer
an economic resource as a result of past events.
3 Criteria for a liability to exist
1. The entity has an obligation
• An obligation is a duty or responsibility that an entity
has no practical ability to avoid.
• Obligation may be legally enforceable as a
consequence of a binding contract or statutory
requirement.
• Constructive obligations arise from normal business
practice, custom, and a desire to maintain good
business relations or act in an equitable manner.
3 Criteria for a liability to exist
2. Transfer of an economic resource
Obligations to transfer an economic resource include:
(a) obligations to pay cash.
(b) obligations to deliver goods or provide services.
(c) obligations to exchange economic resources with another party on
unfavourable terms.
(d) obligations to transfer an economic resource if a specified uncertain
future event occurs.
(e) obligations to issue a financial instrument if that financial instrument
will oblige the entity to transfer an economic resource.
3 Criteria for a liability to exist
3. Present obligation as a result of past events
A present obligation exists as a result of past events only if:
(a) the entity has already obtained economic benefits or taken an
action; and
(b) as a consequence, the entity will or may have to transfer an
economic resource that it would not otherwise have had to transfer.
3 Criteria for a liability to exist
3. Present obligation as a result of past events
A present obligation exists as a result of past events only if:
(a) the entity has already obtained economic benefits or taken an
action; and
(b) as a consequence, the entity will or may have to transfer an
economic resource that it would not otherwise have had to transfer.
 Equity
Equity is the residual interest in the assets of the entity after deducting
all its liabilities.
 Income
Income is increases in assets, or decreases in liabilities, that
result in increases in equity, other than those relating to
contributions from holders of equity claims.
 Income
Income encompasses revenue and gains.

Revenue arises in the course of ordinary regular activities and

is referred to by different names including sales, fees, interest,
dividends, royalties, and rent.

Gains include gain from disposal of noncurrent asset,

unrealized gain on trading investment, and gain from
expropriation.
 Expenses
Expenses are decreases in assets, or increases in liabilities, that
result in decreases in equity, other than those relating to
distributions to holders of equity claims.
 Expenses
Expenses encompass losses as well as those expenses in the
course of ordinary regular activities.

Expenses that arise in the course of ordinary regular activities

include cost of goods sold, wages, and depreciation.

Losses do not arise in the course of ordinary regular activities

and include losses resulting from disasters.
 Statement of Financial Performance
This statement refers to the statement of profit or loss and the
statement of other comprehensive income.
1. The elements directly related to the measurement of
financial position are

a. Asset, liability and equity

b. Asset and hability
c. Income and expense
d. Asset, liability, equity, income and expense
1. The elements directly related to the measurement of
financial position are

a. Asset, liability and equity

b. Asset and hability
c. Income and expense
d. Asset, liability, equity, income and expense
2. The elements of financial position describe amounts
of resources and claims against resources

a During a period of time

b. At a moment in time
c. During a period of time and at a moment in time
d Neither during a period of time nor at a moment in
time
2. The elements of financial position describe amounts
of resources and claims against resources

a During a period of time

b. At a moment in time
c. During a period of time and at a moment in time
d Neither during a period of time nor at a moment in
time
3. The elements directly related to the measurement of
financial performance are

a. Income and expense

b. Asset, liability and equity
c. Asset and liability
d. Income, expense and equity
3. The elements directly related to the measurement of
financial performance are

a. Income and expense

b. Asset, liability and equity
c. Asset and liability
d. Income, expense and equity
4. It is a present economic resource controlled by the
entity as a result of past events

a. Asset
b. Liability
c. Equity
d. Income
4. It is a present economic resource controlled by the
entity as a result of past events

a. Asset
b. Liability
c. Equity
d. Income
5. It is a present obligation of the entity to transfer an
economic resource as a result of past events

a Asset
b. Liability
c. Equity
d. Expense
5. It is a present obligation of the entity to transfer an
economic resource as a result of past events

a Asset
b. Liability
c. Equity
d. Expense
6. It is the residual interest in the assets of the entity
after deducting all of the liabilities.

a. Income
b. Equity
c. Retained earnings
d. All of the choices match the definition
6. It is the residual interest in the assets of the entity
after deducting all of the liabilities.

a. Income
b. Equity
c. Retained earnings
d. All of the choices match the definition
7. It is an increase in asset or a decrease in liability that
results in increase in equity other than contribution
from equity holders.

a. Asset
b. Liability
c. Income
d. Expenses
7. It is an increase in asset or a decrease in liability that
results in increase in equity other than contribution
from equity holders.

a. Asset
b. Liability
c. Income
d. Expenses
8. It is a decrease in asset or an increase in liability that
results in decrease in equity other than distribution to
equity holders

a. Asset
b. Liability
c. Income
d. Expense
8. It is a decrease in asset or an increase in liability that
results in decrease in equity other than distribution to
equity holders

a. Asset
b. Liability
c. Income
d. Expense
9. This arises in the course of ordinary regular activities
of the entity and is referred to by a variety of different
names including sales, fees, interest, dividends,
royalties and rent.

a. Income
b. Revenue
c. Profit
d. Gain
9. This arises in the course of ordinary regular activities
of the entity and is referred to by a variety of different
names including sales, fees, interest, dividends,
royalties and rent.

a. Income
b. Revenue
c. Profit
d. Gain
10. Which statement in relation to income is true?

a. Income encompasses both revenue and gain

b. Revenue encompasses both income and gain.
c. Gain encompasses both income and revenue.
d. Income is technically the same as revenue.
10. Which statement in relation to income is true?

a. Income encompasses both revenue and gain

b. Revenue encompasses both income and gain.
c. Gain encompasses both income and revenue.
d. Income is technically the same as revenue.
11. Which is not within the new definition of an asset?

a. An asset is a present economic resource

b. The economic resource is a right that has potential to
produce economic benefit
c. The economic resources is controlled by the entity as
a result of past event
d. Future economic benefit is expected to flow to the
entity.
11. Which is not within the new definition of an asset?

a. An asset is a present economic resource

b. The economic resource is a right that has potential to
produce economic benefit
c. The economic resources is controlled by the entity as
a result of past event
d. Future economic benefit is expected to flow to the
entity.
12. Which of the following criterin need not be satisfied
for liability to exist?

a. The entity has an obligation.

b. The obligation is to transfer an economic resource
c. The obligation is a present obligation that exists as
result of a past event
d. The settlement is expected to result in an outflow of
economic benefit
12. Which of the following criterin need not be satisfied
for liability to exist?

a. The entity has an obligation.

b. The obligation is to transfer an economic resource
c. The obligation is a present obligation that exists as
result of a past event
d. The settlement is expected to result in an outflow of
economic benefit
13. A present obligation exists as result of past event if

a. The entity has already obtained economic benefit

b. The entity must transfer an economic resource
c. The entity mus not set obtained economic benefit but
transfer an economic resource.
d. The entity has already obtained economic benefit
and must transfer economic resource.
13. A present obligation exists as result of past event if

a. The entity has already obtained economic benefit

b. The entity must transfer an economic resource
c. The entity mus not set obtained economic benefit but
transfer an economic resource.
d. The entity has already obtained economic benefit
and must transfer economic resource.
14. Rights that have the potential to produce economic
benefits and correspond to an obligation of another
entity include all, except

a. Right to receive cash

b. Right to receive goods
c. Right to exchange economic resources with another
entity on favorable terms
d. Right over property, plant and equipment
14. Rights that have the potential to produce economic
benefits and correspond to an obligation of another
entity include all, except

a. Right to receive cash

b. Right to receive goods
c. Right to exchange economic resources with another
entity on favorable terms
d. Right over property, plant and equipment
15. An economic resource could produce economic
benefit if an entity is entitled to all, except

a. To receive contractual cash flows

b. To exchange economic resources with another entity
on unfavorable terms
c. To receive cash by selling the economic resource
d. To extinguish a liability by resource
15. An economic resource could produce economic
benefit if an entity is entitled to all, except

a. To receive contractual cash flows

b. To exchange economic resources with another entity
on unfavorable terms
c. To receive cash by selling the economic resource
d. To extinguish a liability by resource
16. It is the present ability to direct the use of an
economic resource and obtain the benefit that may
flow from it

a. Control
b. Legal right
c. Obligation
d. Ownership
16. It is the present ability to direct the use of an
economic resource and obtain the benefit that may
flow from it

a. Control
b. Legal right
c. Obligation
d. Ownership
17. It is a duty or responsibility that an entity has no
practical ability to avoid.

a. Right
b. Obligation
c. Equity
d. Expense
17. It is a duty or responsibility that an entity has no
practical ability to avoid.

a. Right
b. Obligation
c. Equity
d. Expense
18. Obligations to transfer an economic resource
include all, except

a. Obligation to pay cash

b. Obligation to deliver goods
c Obligation to provide services
d. Obligation to transfer an economic resource even if a
specified future event does not occur
18. Obligations to transfer an economic resource
include all, except

a. Obligation to pay cash

b. Obligation to deliver goods
c Obligation to provide services
d. Obligation to transfer an economic resource even if a
specified future event does not occur
19. Which statement is not true about income and expense?

a. Income is increase in asset or decrease in liability that results

in increase in equity other than contribution from equity
holders
b. Expense is decrease in asset, or increase in liability that
results in decrease in equity other than distribution to equity
holders
c. Income and expenses are the elements that relate to
financial position.
d. Income is broader than revenue.
19. Which statement is not true about income and expense?

a. Income is increase in asset or decrease in liability that results

in increase in equity other than contribution from equity
holders
b. Expense is decrease in asset, or increase in liability that
results in decrease in equity other than distribution to equity
holders
c. Income and expenses are the elements that relate to
financial position.
d. Income is broader than revenue.
20. This new term refers to the statement of profit or loss and
a statement presenting other comprehensive income.

a. Income statement
b. Statement of comprehensive income
c. Statement of financial performance
d. Statement nent of financial position
20. This new term refers to the statement of profit or loss and
a statement presenting other comprehensive income.

a. Income statement
b. Statement of comprehensive income
c. Statement of financial performance
d. Statement nent of financial position