Module 21.3: Expense Recognition Flashcards
What is the matching principle?
expenses to generate revenue are recognized in the same period as the revenue.
What are period costs?
costs that cannot be tagged directly to revenue generation, such as administrative costs.
What is specific identification?
if you can identify exactly which items were sold vs. remain in inventory, you can use this expense method.
What is first in first out? last in, first out?
FIFO - the first item purchased is assumed to be the first sold.
LIFO - the last item purchased is assumed to be the first sold.
Which is more popular in the US, LIFO or FIFO?
LIFO is more popular, because in an inflationary environment, LIFO results in higher cost of goods sold and less tax expense.
What is the weighted average cost method?
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.
are FIFO, LIFO and average cost permitted under GAAP and IFRS?
no, LIFO is prohibited under IFRS.
What is the formula for straight line depreciation expense? How does the expense compare to accelerated methods in the early years?
(Cost - residual value) / useful life
will be lower in the early years, reversed in the later years.
What is the formula for double declining balance depreciation expense?
(2 / useful life) * (cost - accumulated depreciation)
How is amortization expense calculated? what about assets with indefinite lives?
amortization calculated just like depreciation.
If indefinite life - reviewed periodically for impairment.
How does bad debt / warranty expense work?
if a firm sells goods on credit, the matching principle requires the firm to estimate bad debt / warranty expense in the same period.
What happens to prior income statement periods when there is a discounted operation?
restated, separating income or loss from the discontinued operations.
