Q35Q - Intermediate Accounting (Kieso)

Question

Question:  What is meant by the terms elements and items as they relate to the income statement? Why might items have to be disclosed in the income statement?

Step-by-Step Solution

Answer

Elements refer to the essential ingredients of the income statement, which include revenues, losses, gains, and expenses. At the same time, such components are disclosed in the income statement to predict the business's future.  

Step 1:Income statement

An income statement refers to a report that contains the description of a business entity’s revenues and expenses associated with one accounting period.

Step 2:Elements and items related to the income statement

The following major categories are reported in the income statement:

• Revenues: Revenues are the gross receipts generated by a business concern through its operational activities.

• Losses: Losses denote the excess of expenses incurred by a business than revenue generation.

• Gains: Gains refer to the revenues generated from unusual or non-operational activities of the company.

Expenses: Expenses are the cost incurred by a business entity to generate revenues.

Step 3: Importance of disclosing such elements and items

An income statement contains the elements mentioned above to determine the net loss or net income generated by a business from its operating and non-operating activities.

It also facilitates the stakeholders in predicting the company's future and forecasting future profits.