Vol. 3 Expense Recognition Flashcards
(expense recognition)
Under the IASB Conceptual Framework, expenses are …
decreases in economic benefits during the accounting period in the form of outflows or depletions of assets, or;
incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.
(expense recognition)
A general principle of expense recognition is …
the matching principle; matching concept matching of costs with revenues
(expense recognition)
period costs are …
expenditures that less directly match revenues, are reflected in the period when a company makes the expenditure or incurs the liability to pay
(expense recognition)
specific identification method
specifically identify which inventory items were sold and which remained in inventory to be carried over to later periods
(expense recognition)
weighted average cost method
assigns the average cost of goods available for sale to the units sold and remaining in inventory. The assignment is based on the average cost per unit and the number of units sold and the number remaining in inventory.
(expense recognition)
weighted average cost method [calculation]
The weighted average cost per unit would be
$321,600 / 7,600 units = $42.3158 per unit
(expense recognition)
FIFO [Inventory Costing Methods]
Costs of the earliest items purchased flow to cost of goods sold first
(expense recognition)
LIFO [Inventory Costing Methods]
Costs of the most recent items purchased flow to cost of goods sold first
(expense recognition)
three inventory costing methods [list]
FIFO; LIFO; weighted average cost
(expense recognition)
direct write-off method
an approach to recognizing credit losses on customer receivables such that a company waits until a customer defaulted and only then would recognize the loss. This approach is usually NOT consistent with GAAP.
(expense recognition)
Why is the direct write-off method not consistent with GAAP?
Under the “matching principle”, at the time revenue is recognized on a sale, a company is required to record an estimate of how much of the revenue will ultimately be uncollectible.
They cannot wait until the customer defaults.
(expense recognition)
methods for determining credit losses on uncollectible accounts
previous experience whereby such estimates may be expressed as:
· a proportion of the overall amount of sales;
· the overall amount of receivables, or;
· the amount of receivables overdue by a specific amount of time
(expense recognition)
warranty [definition]
if the product proves deficient in some respect, the company will incur an expense to repair or replace the product
(expense recognition)
Why are warranty expenses difficult to account for?
The company does not know the amount of future expenses it will incur in connection with its warranties
(expense recognition)
Long-lived assets [definition]
assets expected to provide economic benefits over a future period of time greater than one year.
(expense recognition)
Long-lived assets [examples]
land (property), plant, equipment, and intangible assets (assets lacking physical substance) such as trademarks.
(expense recognition)
Long-lived assets [depreciation]
the costs of most long-lived assets are allocated over the period of time during which they provide economic benefits
(expense recognition)
two main types of long-lived assets who costs are NOT allocated over time?
land and those intangible assets with indefinite useful lives
(expense recognition)
depreciation [process]
the process of systematically allocating costs of long-lived over the period during which the assets are expected to provide economic benefits.
(expense recognition)
amortization [describe]
amortization is analogous to depreciation, except that it is only applied to intangible long-lived assets and land, as it is not considered a physical asset
(expense recognition)
amortization [process]
commonly applied to te systematic allocation of a premium or discount relative to the face value of a fixed-income security over the life of the security
(expense recognition)
straight-line method
allocates evenly the cost of long-lived assets less estimated residual value over the estimated useful life of an asset
(expense recognition)
calculating depreciation and amortization requires two significant estimates
the estimated useful life of an asset, and;
the estimated residual value (a.k.a. the salvage value)
(expense recognition)
Under IFRS, the residual value of an asset is …
the amount that the company expects to receive upon sale of the asset at the end of its useful life
(expense recognition)
generally, alternatives to the straight-line method of depreciation are called
accelerated methods of depreciation
(expense recognition)
accelerated methods of depreciation
allocate a greater proportion of the cost to the early years of an asset’s useful life
(expense recognition)
accelerated depreciation is sometimes referred to as …
a conservative accounting choice [because it results in lower net income in the early years]
(expense recognition)
IFRS state that if a pattern cannot be determined over the useful life, then the __________ must be used.
the straight-line method
(expense recognition)
Goodwill and intangible assets with indefinite life are not amortised. Instead, they are ….
[assets that are] tested at least annually for impairment
(expense recognition)
Impairment loss
if the current value of an intangible asset or goodwill is materially lower than its value in the company’s books, the value in the company’s books must be decreased
(expense recognition)
Where is goodwill recorded?
in acquisitions
(expense recognition)
Goodwill [definition]
the amount by which the price to purchase an entity exceeds the amount of net identifiable assets acquired