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An analyst must be familiar with the determination of income. Income reported for a business entity depends on proper recognition of revenues and expenses. In certain cases, costs are recog- nized as expenses at the time of product sale; in other situations, guidelines are applied in capi- talizing costs and recognizing them as expenses in future periods.
Required:
a. Under what circumstances is it appropriate to capitalize a cost as an asset instead of expensing it? Explain.
b. Certain expenses are assigned to specific accounting periods on the basis of systematic and rational allocation of asset cost. Explain the rationale for recognizing expenses on such a basis.
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- Which of the following is not a criterion to recognize revenue under GAAP? A. The earnings process must be completed. B. A product or service must be provided. C. Cash must be collected. D. GAAP requires that the accrual basis accounting principle be used in the revenue recognition process.Which of the following is the principle that a company must recognize revenue in the period in which it is earned; it is not considered earned until a product or service has been provided? A. revenue recognition principle B. expense recognition (matching) principle C. cost principle D. full disclosure principleCost is a pervasive constraint on the information that can be provided by financial reporting. Reporting financial information imposes costs, and it is important that those costs are justified by the benefits of reporting that information. b. Describe any THREE (3) costs each incurred by the providers and users of the information. c. Applying a measurement basis to an asset or liability creates a measure for that asset or liability and for the related income and expenses. List the measurement basis as suggested by the revised Conceptual Framework.
- The following statements relate to analysis of expenses in the income statement based on either the nature ofexpenses or their function within the entity. Which statement is incorrect?I. An entity classifying expenses by function shall disclose additional information on the nature ifexpenses including depreciation, amortization expenses and employee benefit cost.II. PAS 1 requires the use of the cost of sales method because this presentation often provides morerelevant information to users than the nature of expense method. a. I onlyb. II onlyc. Both I and IId. Neither I nor IIWhich is incorrect concerning the presentation of Income Statement? A. When items of income and expense are material, their nature and amount shall be disclosed separately. B. An entity shall present extraordinary items separately on the face of the income statement or in the notes to F/S. C. Natural presentation means that expenses are aggregated according to their nature like depreciation and employee benefits. D. Cost of sales method classifies expenses according to their function such as cost of sales, cost of distribution and cost of administrative activities. E. Both the natural presentation and functional presentation has their own merits for different types of entities, so the standard allows management to choose which they think is more relevant and reliable presentation.Revenue is recognized for accounting purposes when a performance obligation is satisfied. In some situations, revenue is recognized over time as the fair values of assets and liabilities change. In other situations, however, accountants have developed guidelines for recognizing revenue at the point of sale. Instructions (Ignore income taxes.) a. Explain and justify why revenue is often recognized at time of sale. b. Explain in what situations it would be appropriate to recognize revenue over time.
- Revenue is recognized for accounting purposes when a performance obligation is satisfied. In some situations, revenue is recognized over time as the fair values of assets and liabilities change. In other situations, however, accountants have developed guidelines for recognizing revenue at the point of sale. Questions: 1. Explain and justify why revenue is often recognized at the time of sale. 2. Explain in what situations it would be appropriate to recognize revenue over time.When is revenue recognized in the following situations?(a) Revenue from selling products, (b) revenue from servicesperformed, (c) revenue from permitting others to usecompany assets, and (d) revenue from disposing of assetsother than products.Income reported for a business entity depends on the proper recognition of revenues and expenses. In certain cases, costs are recognised as expenses at the time of product sale and in other situations costs are capitalised if they bring future benefits.In around 250 words, comment on the above statement. Your comments should include valid examples and illustrations.
- The historical cost principle provides that: Select one: O a. the recorded amount of an acquired item should be the fair market value of the item. b. None of the answers are correct O c. tems whose costs are insignificant compared to other amounts on the financial statements may be accounted for in the most expedient manner. O d. assets and equities be expressed in terms of a common denominator. O e. the expenses of generating revenue should be recognized in the same period that the related revenue is recognized.The firm recognizes an expense when the following condition(s) hold(s): Select one: A. The consumption of the asset results from a transaction that leads to the recognition of revenue. B. The expenditures on advertising must be recognized as expense in the period of expenditure. C. The consumption of the asset results from the passage of time D. All of the aboveRevenue is recognized for accounting purposes when a performance obligation is satisfied. In some situations, revenue is recognized over time as the fair values of assets and liabilities change. In other situations, however, accountants have developed guidelines for recognizing revenue at the point of sale. Explain in what situations it would be appropriate to recognize revenue over time. Ignore income taxes.