Final answer:
The income statement includes revenues, expenses, gains, and losses. The balance sheet details assets, liabilities, and owner's equity. The accounting equation is Assets = Liabilities + Owner's Equity, ensuring the balance sheet is balanced.
Step-by-step explanation:
1. The correct components of the income statement are revenues, expenses, gains, and losses. These elements capture the financial performance of a company over a specified period.
2. The balance sheet lists assets, liabilities, and owner’s equity. It provides a snapshot of a company's financial position at a specific point in time, representing what the company owns, owes, and the equity amount belonging to the owners.
3. The accounting equation is expressed as Assets = Liabilities + Owner’s Equity. This fundamental equation ensures that a company's balance sheet is balanced, reflecting that all assets are financed by borrowing money or using the owner's funds.
4. An element that is not part of the financial statements is the future potential sales price of inventory. Financial statements are historical and account for the value at the point of reporting, not in the future.
5. The correct order of preparing financial statements is income statement, statement of owner’s equity, balance sheet, and then the statement of cash flows. This sequence allows each statement to utilize information from the preceding statement.