Question

E2.5 (LO2) (Elements of Financial Statements) Five interrelated elements that are most directly related to measuring the performance and financial status of an enterprise are provided below. Assets Liabilities Equity Income Expenses Instructions Identify the element or elements associated with the following nine items a. Obligation to transfer resources arising from a past transaction b. Increases ownership interest by issuance of shares. c. Declares and pays cash dividends to owners. d. Increases in net assets in a period from non-owner sources e. Items characterized by service potential or future economic benefit f. Equals increase in assets less liabilities during the year, after adding distributions to owners and subtracting investments by owners. g. Residual interest in the assets of the enterprise after deducting its liabilities h. Increases assets during a period through sale of product I. Decreases assets during the period by purchasing the company's own shares

Answer 1

S. No.	Items	Elements Associated
		Element #1	Reason	Element #2	Reason
a.	Obligation to transfer resoruces arising from a past transaction	Liability	Obligation arising from a past transaction is a liability. The same will be extenguished when we transfer resoruces.	N/A	N/A
b.	Increases ownership interest by issuance of shares	Equity	Issue of shares will lead to a rise in Equity	N/A	N/A
c.	Declares and pays cash dividends to owners	Equity	Distribution of earnings to owners, hence equity	Asset	Since cash is being paid, there is outflow of cash which will reduce the assets.
d.	Increases in net assets from non-owner resources	Income (Comprehensive Income)	Increase in net assets from non-owner sources is when business earns profits on it’s own activities which increases it’s wealth.	N/A	N/A
e.	Items characterized by service potential or future economic benefit	Asset	Assets are resources which provides future economic benefits to the entity.	N/A	N/A
f.	Equals increase in assets less liabilities during the year, after adding distributions to owners and subtracting investments by owners.	Income	This is basically the definition of comprehensive income	N/A	N/A
g.	Residual interest in the assets of enterprise after deducting its liabilities	Equity	Equity basically represents owners' right over the net assets of the company. (Net assets = Assets - Liabilities)	N/A	N/A
h.	Increases assets during a period through sale of product	Income	This item represents "Revenue"	N/A	N/A
i.	Decreases assets during the period by purchasing the company's own shares	Equity	This is basically buy-back of shares wherein the company purchases its own shares from the shareholders for an appropriate price.	Asset	Since cash is being paid, there is outflow of cash which will reduce the assets.

Note : There are some items like item no. c & i for which people have an opinion that those relate to comprehensive income instead of Equity. However in my opinion if you also look at the balance sheet, these items will always affect equity, they do not come in the Income statement.