Elements of Financial Statements

Question 1

What is recognition criteria

Answer 1

Qualities that any asset, liability, income or expense must have before it can be included in a financial statement

Relevance

• Relevant financial info is capable of making a difference to decisions made by users

Faithful Representation

• Means the info in a financial statement accurately presents the events that have occurred in a business for a period of time

Question 2

Definition of an asset

Answer 2

A present economic resource controlled by the entity as a result of past events

Question 3

3 key elements of an asset

Answer 3

• A business that has a right to an economic resource (asset)
• Resource has potential to produce economic benefits
• The business has control over the economic resource - able to decide how the asset will be used

Question 4

Definition of a liability

Answer 4

The present obligation of the entity to transfer an economic resource as a result of past events

Question 5

3 Key elements to a liability

Answer 5

• Existence of an obligation - duty to another party that cannot be avoided
• Transfer of an economic resource - business that has a liability must transfer an economic resource
  
  • Paying the bank money owing
• Liability exists because of a transaction that took place on a past date

Question 6

Income definition

Answer 6

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

Question 7

3 Key elements of income

Answer 7

• Income transaction results in an increase in assets or decrease in liability
• Income transaction results in an increase in equity
• These income transactions exclude any contributions from holders of equity claims

Question 8

Expenses definition

Answer 8

Decreases in assets or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims

Question 9

3 Key elements to definition of an expense

Answer 9

• Expense transaction results in an decrease in assets or increase in liabilities
• Expense transaction results in an decrease in equity
• These expense transactions exclude any distributions from holders of equity claims

Question 10

Equity definition

Answer 10

The residual interest in the assets of the entity after deducting all its liabilities