 Hello, and welcome to this session. This is Professor Farhad. In this session, we would look at the elements of financial statement. This topic is very important in your accounting education. Simply put, if you don't have a good understanding of the elements of financial statements, you're gonna be lost. You won't be able to do journal entries. You won't be able to prepare financial statements. So knowing the elements is critical to your success in accounting education. This topic is covered in intermediate accounting, also covered in financial accounting, and surely it's a topic that you need to be familiar with, very much familiar with, on the CPA exam, the FAR section. As always, I would like to end everyone to connect with me on LinkedIn. If you haven't done so, YouTube is where you would need to subscribe. I have 1,600 plus accounting, auditing, tax, and finance lectures. This is all the courses that I cover, including hundreds of CPA questions. If you like my lectures, please like them. Click on the like button. Share them. Put them in playlist. Let the world know about them. If they benefit you, it means they might benefit other people. On my website, you'll have additional resources such as PowerPoint slides, notes, true, false, multiple choice, exercises that's gonna help you with your accounting education. And if you are studying for your CPA exam, 2,000 plus CPA questions. And this is a list of all, the simplest of all the courses and exam material that I have. Let's take a look at this exercise to illustrate the concept of the financial statement elements, okay? Below are 10 unto related elements that are directly related to measuring the performance and financial status of an enterprise. Assets, liabilities, equity, investment by owners, distribution to owners, comprehensive income revenues, expenses, gains and losses. And what they're doing here is they're giving you some definitions and you need to match the definition with the term. Identify the element or elements associated with the 12 items below. To simply put, we're gonna read the statement and we're gonna determine what does it, what does it likely represent? A, arises from peripheral or incidental transaction. Do you know what financial elements are considered incidental or peripheral to the business? Well, peripheral and a peripheral incidental means they are not part of the central ongoing operation. And the answer is gains and losses, those two. Gains and losses are transaction that are considered peripheral, incidental. They're not part of the central ongoing operation. For example, if I have a restaurant, let's assume I sell food, that's in the business of selling food, I might have an investment in stocks. Maybe I have some extra money that I have and I invest in stocks and I sell my investment and I incur a gain or I incur a loss. Well, that's a gain or a loss. I'm in the business of serving food to my customers, that's my business, I'm in the restaurant business, but I could own stocks, okay? I could have rental property, but that's incidental to my business. That's not part of my central ongoing operation. So gains and losses will fit definition A, gains and losses, they are incidental. B, obligation to transfer resources arises from past transaction. Now I hope that you kind of figured out, once I said obligation, obligation means you owe someone money, okay? To transfer resources, resources, usually assets, arising from past transaction. Guess what? A liability is that definition. Liability is an obligation, you have an obligation, you have to provide resources, assets to someone because you have an obligation from a past transaction. So something happened in the past, you borrowed money, you bought goods and services on account, whatever that is, and you incurred a liability, okay? C, increase ownership interest. How do you increase ownership interest? Now increase ownership interest means you own, for example, 5%, and that 5% goes from 5% to 7%. How can you increase your ownership interest? Well, what do you have to do? You have to make contribution, you have to make investment in the company. So what's the correct term here? Investment, investments by owners, when you make investments, then you increase your ownership, for example, from 5% to 7%, if you contribute more money. Now increase in contribution could be the result of revenues, like for example, if the company generates revenues and they give you the revenue and you reinvest, or if you generate gains, okay? And sometimes through comprehensive income, for example, if the company incurred some sort of a profit, they'll pass it to you, you'll reinvest in the company, that could be a possibility. But generally speaking, investment by owner is what increase your ownership interest. D, declares and pays cash dividend to owners. What is that? That's distribution to owners, sometime in some textbook it's called dividend. Dividend or distribution to owners, distribution to owners when you paid, actually they use the word dividend here, that's fine. So that's a distribution to owners. E, increase a net asset in a period from non-owner sources, non-owner sources. Well, what is that definition? Well, if you look at the definition of comprehensive income is increase an asset from non-owner sources, what does that mean? It means your assets went up, your receivable went up, your cash went up. But that's the result of a non-owner sources. What are the owner sources? Well, for example, you could have, you could have investment by owners. This is an owner sources. You could invest in the company, that's an owner source. But those are non-owner sources. Any increase in net asset that's non-owner sources is considered comprehensive income. Also from non-owner sources could be revenues because it's increase in the business, increase in the net asset of the business because the more you generate revenues, the more profit you have, it could be gains do the same thing, okay? So this is what increase in net asset from non-owners because the owners can also increase the net asset of the business by contributing money. F, items characterized by service potential for future economic benefit. So something that have potential for future economic benefit. What is that? That's the definition of an asset. Assets are resources that could potentially provide future benefit. That's what an asset is. That's what an asset is. That's what an asset is. G, equal increase in assets less liabilities during the year after adding distribution to owners and subtracting investment by owners. So let's see this. So you have an increase in assets minus liabilities, technically an increase in net asset because assets minus liabilities in net asset after adding distribution to owners and subtracting investment by owners. So you add the distribution by owners, you deduct the investment by owners kind of, you took the, so basically distribution to owners and investment by owners. Those are owners, owners sources. So what they're saying after owner sources, it means after owner sources, it means non-owner sources. And every time we hear the term non-owner sources, what we're looking at is comprehensive income. We're looking at revenues, we're looking at gains. So what could increase your asset less liabilities? Assets less liabilities is the same thing as net, the same thing as net assets or the same thing as equity. So simply put they're asking you here, what could increase your net asset? What could you increase your equity without taking into account distribution to owners and subtraction of investment by owners? Well, what's left is comprehensive income, mainly revenues and end gains, okay? H, something arises from income statement activities that constitute the entity's ongoing major or central operation. So something happened from the income statement activities that's part of your central or ongoing operation. Well, guess what? Central and ongoing operations are your revenues minus your expenses. So here we are dealing with revenues and we are dealing with expenses. I, residual interest in the asset of the enterprise after deducting liabilities means asset minus liabilities. What is assets minus liabilities equal to? Equal to equity or net asset of the business. So the answer is equity, equity. J, increase in assets during the period through the sale of the product. Well, hopefully you know this when you sell the product, when you provide, when you generate sales, it's called revenues, revenues. It's ongoing operation, revenues, revenues. K, decrease in assets during the period by purchasing the company's own stock. Now what we're doing is we are buying our own stock. Simply put, when you buy your own stock is you are distributing the cash of the company to the owners. So it's a distribution to owners because you are given the owners the money back. Okay, just like when the owners give you the money, it's investment by owners. When you buy back the stocks from the owners, your assets goes down, which is your cash, it's a distribution. I include all changes in equity during the period except those resulting from investment by owners and distribution by owners, which is everything except non-owner sources, you got it. Comprehensive income, comprehensive income. Now, the other thing you wanna be comfortable with here is this, I'm gonna do this real quick. You wanna know where each item goes. So I'm gonna tell you assets, liabilities, equity, comprehensive income, and I would say distribution to owners. Well, let's, yeah. Well, let's not be too technical here. Okay, let's see. So assets, assets, assets, liabilities, equity, and under equity, you can have investment by owner, distribution by owner and comprehensive income. Those are part of equity. All of those are what we called balance sheet account. And what's left, revenues, expenses, gains and losses, those are called, we can generalize them as income statement account. Now, distribution by owners, which is dividend, which is the technically dividend, sometime it goes on the statements of stockholders' equity. So it's part of equity that will, it has its own statement, or sometime it goes on the statement of retained earnings. Same thing as distribution and investment by owner. They go to the statement of retained earning or statement of stock, holders' equity. But what I did, I combined them under equity because they are technically equity accounts. So in your textbook, if you see them, their statement of retained earning or part of the statement of stockholders' equity, it's still equity, it's still equity. That's why I said, I'm putting them under the umbrella of balance sheet, although they could be in their own, their own financial statement. So once again, if you don't understand the elements of financial statements, you will struggle. You will struggle from the one in your accounting career and your accounting courses. I would like to also remind you to go back and revisit my website. You study for your accounting once in your lifetime. You study for your CPA exam once in your lifetime. Invest properly. This is a 40 to 50 year investment. Pass the exam, pass your accounting courses. I'm here to help.