Expense Recognition (17.3) Flashcards
Describe the matching principle
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
Not all expenses can be directly tied to revenue generation. These costs are known as period costs. Period costs, such as administrative costs, are expensed in the period incurred.
What are the 3 Inventory expense recognition methods?
FIFO -FIFO is appropriate for inventory that has a limited shelf life.
LIFO - LIFO is appropriate for inventory that does not deteriorate with age.
Weighted avg. cost - popular because of its ease of use.
How is ending inventory calculated using FIFO
The cost of the most recent purchases is used to calculate ending inventory
How is ending inventory calculated using LIFO
The costs of beginning inventory and earlier purchases are assigned to ending inventory
How is ending inventory calculated using the weighted avg. cost method?
The cost per unit is calculated by dividing cost of available goods by total units available, and this average cost is used to determine both cost of goods sold and ending inventory.
What are the names for allocation of cost over an long-lived assets’ life (tangibles, intangibles, & natural resources)?
The allocation of cost over an asset’s life is known as depreciation (tangible assets), depletion (natural resources), or amortization (intangible assets).
Describe the straight-line depreciation method and how it’s used.
The straight-line method recognizes an equal amount of depreciation expense each period.
In the early years of an asset’s life, the straight-line method will result in lower depreciation expense (because it generates more benefits in it’s early life)
SL depreciation expense = (cost – residual value) / (useful life)
Describe the accelerated depreciation method and how it’s used.
Accelerated depreciation speeds up the recognition of depreciation expense in a systematic way to recognize more depreciation expense in the early years of the asset’s life and less depreciation expense in the later years of its life.
Total depreciation expense over the life of the asset will be the same as it would be if straight-line depreciation were used.
Describe the declining balance depreciation method and how it’s used.
The declining balance method (DB) applies a constant rate of depreciation to an asset’s (declining) book value each year.
*note: also known as the diminishing balance method.
Describe the double declining balance depreciation method and how it’s used.
The most common declining balance method is double-declining balance (DDB), which applies two times the straight-line rate to the declining balance. If an asset’s life is ten years, the straight-line rate is 1/10 or 10%, and the DDB rate would be 2/10 or 20%.
DDB depreciation=(2/useful life)(cost–accumulated depreciation)
Describe amortization
Amortization is the allocation of the cost of an intangible asset (such as a franchise agreement) over its useful life.
Are intangible assets with indefinite lives amortized?
Intangible assets with indefinite lives (e.g., goodwill) are not amortized.
However, they must be 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.
How is income from discontinued operations reported?
Any income or loss from discontinued operations is reported separately in the income statement, net of tax, after income from continuing operations.
Discontinued operations do not affect net income from continuing operations.
If a firm changes their accounting policies, does this require retrospective or prospective application on statements?
changes in accounting policies require retrospective application.
*In the recent change to revenue recognition standards, firms were given the option of modified retrospective application. This application does not require restatement of prior-period statements; however, beginning values of affected accounts are adjusted for the cumulative effects of the change.
