 Hello and welcome to the session. This is Professor Farhad in which you would look at the elements of financial statements. It's very important as an accounting students or a CPA candidate to understand what elements, what are the pieces of the puzzle that we work with as accountant. In simply put, the elements are listed right here, assets, liabilities, equity, investment by owners, distribution to owners, revenues, expenses, gains, losses and investment by owners. So those are the elements of financial statements. However, in this exercise, we're going to match the definition to the element. So we're going to read the definition and we're going to determine which element does it fit. I'm going to go a step further. I'm going to ask you or I'm going to try to go over this by going over which financial statement does this entry goes on? Does this element goes on? Is it the income statement? Is it the balance sheet? Or is it the statements of stockholders equity? And I will ask you, I will do one more thing is what's the normal balance because this is basically basic information. So let's cover all our basis when it comes to the elements of financial statements. Starting with number one, something that arises from peripheral or incidental transaction. So when we say peripheral or incidental, what does that mean? That means some transaction that we don't we don't carry on regular basis. They're incidental. They happen every once in a while. They're peripheral. They're not part of our central ongoing operation. Okay. Would you say that will be revenues or expenses? I would say no because revenues and expenses are always part of our central ongoing operation. I would say gains and losses fits this definition. So gains and losses are peripheral or incidental transaction. What does that mean? Think about a company like McDonald's McDonald's. What do they do? What's their revenue? Selling burgers, selling food. Now every once in a while, McDonald's might sell a warehouse and incur a loss or they might might sell the warehouse and incur again because they purchased it. They sell it for more than their basis or they sold it for less than their basis what they paid for. Well, that's fine. They either have a gains or losses from transaction that has nothing to do with selling food or sometime they might buy an investment. They might buy Apple stock. Apple stock might go up and they might sell it. Well, that's a gain. That's not revenue because that's not what they do. So those are the gains and the losses. And by the way, gains are like revenues. They increase on the credit and losses are like expenses. They increase on the debit. And both are income statements account to obligation to transfer resources arising from past transaction. So what element of the financial statement would reflect any obligation you might have for transferring resources something because of something happened in the past? Well that sounds like to me like that, like a liability. And this is the definition of a liability basically. And this is the liability right here. Those are liabilities. They increase on the credit side liabilities increase on the credit side and they go on the balance sheet. So this is number two number three increases ownership interest. What increases ownership interest? Well, directly what increases ownership interest is investment by owners. Investment by owners will increases ownership interest and that's usually reflected in common stock and it's usually it increases on the credit side and common stock is part of the balance sheet but also it could be listed as part of the stockholders equity but it ends up part of the balance sheet. This is what would increase ownership interest. Four, declares and pays cash dividend to owners. So what will declares and pays cash dividend to owners? That's the definition of what? Well, that's when you distribute to owners profit from the company. This is the definition of declare and pays dividend to owners. That's what it is. Revenues and net asset in a period from non owner sources. So now what happened is this we are increasing net asset increasing net asset but that increase has nothing to do with the owners so we cannot count investment by owners. So anything that increases assets other than non owner sources, what are they? They could be revenues. They could be gains because revenues increases equity, gains increases equity for the equity of the company, those two account increases equity. Now also by definition, if you want to say revenues and gains, revenues and gains are also part of comprehensive income. So you could also say comprehensive income is something that's non owner sources that increases net asset, which is the equity. When we say net asset, net asset is the same as equity. So to be specific, non owners means take out distribution by owners and investment by owners. So owners are out. This is what we mean by non owners. Number six, item characterized by service potential or future economic benefit. What do we call those resources, stuff that we say they provide future service? What are those? Those are assets, that's easy assets. Remember assets, they increase on the debit side and they go on the balance sheet or balance sheet account assets. Make sure you know this. This is the definition of an asset. Equal increases an asset, less liabilities during the period after adding distribution to owners and subtracting investment by owners. Well, so there was an increase in assets minus liabilities. It's an increase in net asset in equal increase in assets less liabilities means it's an increase in net asset after adding going back and adding the distribution and subtracting the investment. What does that mean? That means we are increasing net asset that we are not including the distribution from owners or the contribution by owners. That's why we added the distribution subtracted the investment to take their effect out. Well, again, that's comprehensive income. It's everything that increases equity except the owner transaction, which is called CI or comprehensive income. I don't have it up there, but the answer is comprehensive income. If you don't know what comprehensive income is, by all means, you need to know what comprehensive income go to the comprehensive income lesson. It's everything, everything that could affect equity except owners, owners transaction, which is investment by owners, distribution by owners. You know, I kept saying this several times, but it's worth repeating arises from income statement activities. That's easy. Now we are down to revenues, expenses, gains and losses that constitute the entity's ongoing major operation. That's easy. That's one and eight basically one and eight basically the same, but here it's constitute central ongoing operation. Those are revenues and expenses. Revenues like gains, they increase on the credit expenses. They take a debit and they already told you their income statement activities. So it's revenues and expenses. Number nine, residual interest in the asset after the enterprise is deducted its liabilities. All what they're asking you here, do you know what asset minus liabilities are assets minus liabilities equal to equity in the answer is you got it. That's equity and equity is composed of many accounts, revenues, expenses, gains, losses, which is comprehensive income as well as investment by owners and distribution by owners. Number 10, increase increases asset during the period through the sale of a product. What is that when we sell product? What is that? That's revenue. That's the definition of revenue decreases asset during the period by purchasing the company's own stocks. Now we are decreasing the asset, but how are we doing so by purchasing our own stock? Our own stock, you might think decreasing an asset could be inexpensive, but no, we are buying back our own stock. Well that's distribution to owners. We are making it when you buy your own stock, you're giving money to the owners. You're buying their stock distribution to owners. Let's look at 12 include all changes in equity during the period except those resulting from investment by owners and distribution by owners. So notice how many times we went through this. Seven, seven, 12, they're basically the same, okay? Because they said look at everything that changes in equity except anything that has to do with owners. We call this everything else other than owner transaction is comprehensive income, comprehensive income. That's good. Now this is important. You want to know the basic elements where everything goes and the basic elements of financial statements. If you don't know these you're in trouble. This is accounting 101 or at least intermediate because some terms here you would learn an intermediate, but you got to know this. What should you do now? Go to farhatlectures.com, work, MCQs, true fault, true faults, additional exercises that's going to help you do better on your CPA exam. Good luck, study hard and of course stay safe.