21.3: Expense Recognition Flashcards
How are expenses defined under IASB?
Expenses are decreases in economic benefits.
Under the accrual method of accounting, expense recognition is based on?
Under the accrual method of accounting, expense recognition is based on the matching principle, whereby expenses to generate revenue are recognized in the same period as the revenue.
What are period costs?
Period costs are expenses not tied directly to revenue generation, like administrative costs, that are expensed in the period incurred.
What are the 3 inventory expense recognition methods?
- Specific identification method (ie. assigning an ID number to each inventory)
- FIFO/LIFO (first item sold is assigned to the price of first item purchased)
- Weighted average cost (first item sold is assigned to the price of last item purchased)
Which inventory recognition methods are permitted under IFRS? Under GAAP?
FIFO and weighted average cost are permitted under IFRS. LIFO is permitted under GAAP but not under IFRS.
What inventory is FIFO appropriate for?
FIFO is appropriate for inventory that has a limited shelf life.
What inventory is LIFO appropriate for?
LIFO is appropriate for inventory that does not deteriorate with age.
Why is LIFO popular in the US?
LIFO is popular because of its income tax benefits. In an inflationary environment, LIFO results in higher COGS which results in lower taxable income and therefore lower income taxes.
What are the 2 methods to recognize depreciation? How are they calculated? What is the difference in recognition between the 2 periods?
- Straight-line depreciation, which generates an equal amount of depreciation expense each period.
SL depreciation expense = (cost - residual value)/ useful life
- Accelerated depreciation method, which generates more benefits in the early years of their economic life and fewer in latter years.
A. Declining balance method applies a constant rate of depreciation to an asset’s declining book value each year.
B. Double declining method applies two times the straight-line rate to the declining balance.
Double-declining balance = 2/useful life times cost - accumulated depreciation
How are long-lived assets defined?
Long-lived assets are expected to provide economic benefits beyond one accounting period.
What is amortization? What method is more commonly used?
Amortization is the allocation of the cost of an intangible asset over its useful life.
Example: franchise agreement
Amortization expense is more commonly calculated with SL method.
How are intangible assets with indefinite lives, like goodwill, amortized?
Intangible assets with indefinite lives are not amortized and are instead tested for impairment at least annually. If the asset value is impaired, an expense equal to the impairment amount is recognized on the income statement.
What does the matching principle require for goods or services sold on credit or warranty to the customer?
The matching principle requires the firm to estimate bad debt expense and or warranty expense, thereby recognizing the expense in the period of the sale rather than later.
What happens to net income when expense recognition is delayed?
Net income increases when expense recognition is delayed.
Define discontinued operation.
Discontinued operation is one that management has decided to dispose of, but either has not yet done so or has disposed of in the current year after the operation had generated income or losses.
