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.