Vol. 3 LM1 Expenses Flashcards
treatment of expenses
deducted against revenue to arrive at a company’s net profit or loss.
Concept
are deducted against revenue to arrive at a company’s net profit or loss
expenses
Define
expenses under the IASB Conceptual Framework
“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.”
In general, a company recognizes ____ in the period that it consumes (i.e., uses up) the economic benefits associated with the expenditure, or loses some previously recognized economic benefit.
expenses
A general principle of expense recognition is the ____
matching principle
____ requires that a company recognizes cost of goods
sold in the same period as revenues from the sale of the goods.
matching
Concept
are expenditures that less directly match revenues
period costs
Describe
period costs
are reflected in the period when a company makes the expenditure or incurs the liability to pay.
Kahn Distribution Limited (KDL), a hypothetical company, purchases
inventory items for resale. At the beginning of 2018, Kahn had no inventory on hand. During 2018, KDL had the following transactions:
First quarter 2,000 units at $40 per unit
Second quarter 1,500 units at $41 per unit
Third quarter 2,200 units at $43 per unit
Fourth quarter 1,900 units at $45 per unit
Total 7,600 units at a total cost of $321,600
- KDL sold 5,600 units of inventory during the year at $50 per unit, and received cash.
- KDL determines that there were 2,000 remaining units of
inventory and specifically identifies that 1,900 were those purchased in
the fourth quarter and 100 were purchased in the third quarter. - What are the revenue and expense associated with these transactions during 2018 based on specific identification of inventory items as sold or remaining in inventory?
- (Assume that the company does not expect any products to be returned.)
The revenue for 2018 would be $280,000 (5,600 units × $50 per unit). Initially, the total cost of the goods purchased would be recorded as inventory (an asset) in the amount of $321,600. During 2018, the cost of the 5,600 units sold would be expensed (matched against the revenue) while the cost of the 2,000 remaining unsold units would remain in inventory as follows:
COGS
From the first quarter 2,000 units at $40 per unit = $80,000
From the second quarter 1,500 units at $41 per unit = $61,500
From the third quarter 2,100 units at $43 per unit = $90,300
Total cost of goods sold $231,800
COG remaining in inventory
From the third quarter 100 units at $43 per unit = $4,300
From the fourth quarter 1,900 units at $45 per unit = $85,500
Total remaining (or ending) inventory cost $89,800
To confirm that total costs are accounted for: $231,800 + $89,800 =
$321,600. The cost of the goods sold would be expensed against the revenue of $280,000 as follows:
Revenue $280,000
Cost of goods sold 231,800
Gross profit $48,200
Concept
specifically identify which inventory items were sold and which remained in inventory to be carried over to later periods.
specific identification method
Concept
the oldest goods purchased (or manufactured) are assumed to be sold first and the newest goods purcahsed (or manufactured) are assumed to remain in inventory
FIFO
Concept
assigns the average cost of goods available for sale to the units sold and remaining in inventory.
weighted average cost method
Cost of Goods Sold When Prices Are Rising
FIFO
lowest
Cost of Goods Sold When Prices Are Rising
LIFO
highest
Describe
doubtful accounts
When a company sells its products or services on credit, it is likely that some customers will ultimately default on their obligations (i.e., fail to pay).
