Which of the following is the correct definition of an element that is reported on financial statements?

Question

BlackTom AI · Accepted Answer

The question asks for the correct definition of an element that is reported on financial statements, and provides four definitional statements to evaluate.
Option 1: 'Assets are resources that the entity controls that result from past events and that will require a future outflow of cash.' This matches the standard definition of assets: resources controlled by the entity due to past events, with expected future economic benefits, though it specifically mentions a future outflow of cash which is not necessary for all assets; some assets may generate benefits without a direct cash outflow in the future (for example, receivables or intangible assets). Overall, this is largely accurate as a definition of assets, but note that not every asset must entail a future cash outflow; some may involve future economic benefits like services or non-cash consideration.
Option 2: 'Liabilities are obligations that will arise from future events and are expected to be settled with a future outflow of cash.' This is a broadly correct description of liabilities: present obligations arising from past events, expected to cause an outflow of resources embodying economic benefits, typically cash, though some settlements can be in other assets or may be settled by providing services. The phrase 'will arise from future events' can be misleading; liabilities arise from past events and present obligations, but the expectation of a future outflow is accurate as part of their definition.
Option 3: 'Expenses are costs that arise only from the ordinary activities of the business and exclude losses that may arise outside of the normal activities of the entity.' This is inaccurate. Expenses are costs recognized in the period they are incurred to generate revenue, and they can arise from both ordinary activities and other activities; losses from non-ordinary activities can also be recognized as expenses or as separate loss items. Limiting expenses to ordinary activities excludes legitimate costs that reflect non-core or unusual events. This statement mischaracterizes the scope of expenses.
Option 4: 'Gains are increases in equity (net assets) resulting from incidental transactions.' This aligns with the general accounting definition of gains: increases in equity from peripheral or incidental activities beyond the entity’s core operating activities. Gains are indeed reported on financial statements as part of comprehensive income or net income, depending on the framework, and reflect non-operating or peripheral gains.
In evaluating these definitions, it’s important to separate correctness from completeness and context. Option 1 is a solid, standard descriptor of assets with a practical nuance about cash outflows. Option 2 is a solid, standard descriptor of liabilities with the typical cash-out expectation. Option 3 contains a misstatement about the scope of expenses and losses, making it the weakest of the four. Option 4 correctly captures the concept of gains as increases in equity from incidental transactions, aligning with how gains are reported.
Overall, the options present a mix of accurate and flawed definitions, with option 3 clearly incorrect due to its restrictive characterization, options 1 and 2 being broadly correct though with minor nuances, and option 4 accurately describing gains. The evaluation hinges on the specific wording and the nuance that not all assets require a future cash outflow, and that liabilities are obligations present from past events, not future events. The important distinction is that only option 3 contains a substantive factual inaccuracy about expenses and losses, while the others convey acceptable formulations with typical accounting caveats.

BUSI_V 353 972 2025SS BUSI 353 Midterm - Summer 2025 - Requires Respondus LockDown Browser

Which of the following is the correct definition of an element that is reported on financial statements?

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