FAR - Financial Statement Acct - Costs & Expenses

Question 1

Cost

Answer 1

Economic Sacrifice - cause the recognition of:

1) expense - decrease asset/increase liab part of primary business activity
2) loss - decrease in net asset, incidental transaction
3) asset - probable future economic benefit

Question 2

Timing of cash payment

Answer 2

cash payments precede expense recognition = asset is recorded

expense precede cash payments = liab recorded

Question 3

Matching principle

Answer 3

1) expense link to revenue: COGS/Sales Commission
2) expense link to revenue in a specific time period: salaries, property taxes
3) expenses link to benefits over 1 period: depreciation
4) expense recognized when incurred: advertising/R&D

Question 4

Advertising Costs

Answer 4

Expensed as incurred OR when advertising first occurs

Policy must be consistently applied

Question 5

Advertising Acct for direct response advertising

Answer 5

direct response advertising - advertiser directly engages with customer & costs are capitalized which are then amortized as advertising expenses over an expected period of benefit

Costs:

1) incremental direct costs (logos/internet adv.)
2) salary costs
3) assets

Question 6

Property Taxes

Answer 6

Levied on property owned by firm on a specific date
Accrue expense/payable over fiscal year
Est. annual amount until actual # is known

Question 7

IFRS - Advertising Costs difference

Answer 7

does NOT allow capitalization of expenses, instead, expensed as incurred

Question 8

Acct credited after tax accrual paid

Acct credited before tax accrual paid

Answer 8

1) prepaid property tax

2) property tax payable

Question 9

Compensated absences

Answer 9

vacation, holiday, sick leave periods - employee is compensated, GAAP requires accrual accounting if 4 criteria met

Question 10

Compensated absences - 4 criteria for accrual acct

Answer 10

1) obligation attributable to services rendered
2) rights vest (benefits no longer contingent on continued employment)/accumulate
3) payment of obligation is probable
4) amount of obligation is probable

Question 11

Vesting

Answer 11

Employee has right to benefit, can leave the firm and be paid benefits if vested.

Question 12

Accumulation

Answer 12

don’t take the benefit this year and is carried to next year, some firms place a limit on accumulation of benefits

Question 13

Measurement of accrual

Answer 13

Measurement based on current/future wage rates (current rates used = lower expense accrual) -> any difference in change of rate is treated as a change of estimate/expense paid, recognized currently. only benefits probable to be paid/estimable amount are accrued

Question 14

Compensated absence liability

Answer 14

not discounted, reported at nominal (future) value, represents benefits likely to be paid, only exists if rights vest or are allowed to accumulate

Question 15

Sick Pay benefits

Answer 15

sick pay benefits may need not be accrued because illness cannot be predicted, if used routinely, accrual is required because the benefits vest

Question 16

Benefits not accrued

Answer 16

not all earned compensated absence benefits are accrued, b/c not all benefits are taken by employees = let portion lapse