In equity. These gains and losses are achieved through

In today’s business environment, repetitive financial
processes and procedures often follow specific strategies that provide
structure and guidance to those completing the work.  These guidelines work to identify the data that
should be considered or presented in the outcome of a financial process or
procedure.  In accounting, there exists many
repetitive processes that generate financial data.  These financial processes mainly focus on generating
useful financial information that can be used to help make informed decisions.  Hermanson, Edwards, and Maher (2015) explain
that this financial data comes in the form of financial statements and is used by
both internal and external stakeholders in the decision-making process.    

            Financial
statements are developed using a specific framework that is comprised of ten
basic elements.  Cecil and King (2011)
indicate that these basic elements consist of revenues, expenses, gains, losses,
comprehensive income, investments by owners, distributions to owners, assets,
liabilities, and equity.  At a very high
level, all the financial information that is present on a financial statement is
derived from these ten basic elements.  As
a result of business operations, these core elements are encountered as they
have the ability to impact the financial data of a business.  Hermanson, Edwards, and Maher (2015) indicate
that business transactions can result in future benefits and sacrifices.  Spiceland, Sepe, and Tomassini (2007) explain
that assets are the future financial benefits that are owned or operated by a
business while liabilities are the financial sacrifices that are made by a
business as a result of business transactions. 
Hermanson, Edwards, and Maher indicate the amount of interest in the
business’s assets is called equity.  This
is determined by subtracting the assets from the liabilities.

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            Spiceland,
Sepe, and Tomassini (2007) mention that equity is impacted by the elements of
gains and losses.  Hermanson, Edwards,
and Maher (2015) indicate that gains are increases in the business’s equity
while losses are decreases in the business’s equity.  These gains and losses are achieved through
revenues, investments by owners, expenses, and distributions to owners.  Spiceland, Sepe, and Tomassini explain that
revenues are inflows of assets to a business while expenses are outflows of a
business’s assets.  Equity is also
increased by investments by individuals interested in ownership.  Hermanson, Edwards, and Maher mention that
investments by owners can increase a business’s equity through exchanging
investments for ownership rights in the business.  These investors can also see payouts in the
form of dividends.  Spiceland, Sepe, and
Tomassini explain that dividends, or distributions to owners, will decrease a
business’s equity as a result of the outflow of cash to the investor.  The element of comprehensive income focuses
on the concept of equity from sources other than ownership.  Hermanson, Edwards, and Maher explain that
comprehensive income looks at the fluctuation of equity resulting from business
transactions over a specific period of time. 

            These core elements
are utilized to categorized and compile the data found in financial statements.  Hermanson, Edwards, and Maher (2015) indicate
that the income statement primarily tracks the revenues and expenses of a
business over a specific period of time. 
The revenues and expenses can then be used to determine the profitability,
or net income, of the business by subtracting the expenses from the revenues.  The net income and dividends must be tracked
over a period of time to help determine a business’s financial position.  Spiceland, Sepe, and Tomassini (2007) mention
that the statement of retained earnings looks at the net income and dividends over
period of time to provide insight and clarity into the financial position of a
business.  Hermanson, Edwards, and Maher
also explain that the statement of retained earnings is used to connect two different
balance sheets. 

While the income statement focuses on the
financial data over a period of time, the balance sheet looks at a specific point
in time (Hermanson, Edwards, and Maher, 2015). 
Spiceland, Sepe, and Tomassini (2007) explain that the balance sheet focuses
on the assets, liabilities, and stockholder’s equity of a business.  The assets, liabilities, and stockholder’s
equity are then used to determine the overall financial position at that point
in time.  Hermanson, Edwards, and Maher
indicate that the statement of cash
flows is used to provide insight into the inflow and outflows of cash for a
business over a specific period of time. 
Spiceland, Sepe, and Tomassini explain that the inflows and outflows primarily
come from activities related to operating, investing, and financing for a
business.  Should issues arise for a
business, this statement can be reviewed to determine which activities, or lack
thereof, are causing financial distress for a business. 

 

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