Vol. 3 Expense Recognition

Question 1

(expense recognition)
Under the IASB Conceptual Framework, expenses are …

Answer 1

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.

Question 2

(expense recognition)
A general principle of expense recognition is …

Answer 2

the matching principle; matching concept matching of costs with revenues

Question 3

(expense recognition)
period costs are …

Answer 3

expenditures that less directly match revenues, are reflected in the period when a company makes the expenditure or incurs the liability to pay

Question 4

(expense recognition)
specific identification method

Answer 4

specifically identify which inventory items were sold and which remained in inventory to be carried over to later periods

Question 5

(expense recognition)
weighted average cost method

Answer 5

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.

Question 6

(expense recognition)
weighted average cost method [calculation]

Answer 6

The weighted average cost per unit would be
$321,600 / 7,600 units = $42.3158 per unit

Question 7

(expense recognition)
FIFO [Inventory Costing Methods]

Answer 7

Costs of the earliest items purchased flow to cost of goods sold first

Question 8

(expense recognition)
LIFO [Inventory Costing Methods]

Answer 8

Costs of the most recent items purchased flow to cost of goods sold first

Question 9

(expense recognition)
three inventory costing methods [list]

Answer 9

FIFO; LIFO; weighted average cost

Question 10

(expense recognition)
direct write-off method

Answer 10

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.

Question 11

(expense recognition)
Why is the direct write-off method not consistent with GAAP?

Answer 11

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.

Question 12

(expense recognition)
methods for determining credit losses on uncollectible accounts

Answer 12

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

Question 13

(expense recognition)
warranty [definition]

Answer 13

if the product proves deficient in some respect, the company will incur an expense to repair or replace the product

Question 14

(expense recognition)
Why are warranty expenses difficult to account for?

Answer 14

The company does not know the amount of future expenses it will incur in connection with its warranties

Question 15

(expense recognition)
Long-lived assets [definition]

Answer 15

assets expected to provide economic benefits over a future period of time greater than one year.

Question 16

(expense recognition)
Long-lived assets [examples]

Answer 16

land (property), plant, equipment, and intangible assets (assets lacking physical substance) such as trademarks.

Question 17

(expense recognition)
Long-lived assets [depreciation]

Answer 17

the costs of most long-lived assets are allocated over the period of time during which they provide economic benefits

Question 18

(expense recognition)
two main types of long-lived assets who costs are NOT allocated over time?

Answer 18

land and those intangible assets with indefinite useful lives

Question 19

(expense recognition)
depreciation [process]

Answer 19

the process of systematically allocating costs of long-lived over the period during which the assets are expected to provide economic benefits.

Question 20

(expense recognition)
amortization [describe]

Answer 20

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

Question 21

(expense recognition)
amortization [process]

Answer 21

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

Question 22

(expense recognition)
straight-line method

Answer 22

allocates evenly the cost of long-lived assets less estimated residual value over the estimated useful life of an asset

Question 23

(expense recognition)
calculating depreciation and amortization requires two significant estimates

Answer 23

the estimated useful life of an asset, and;
the estimated residual value (a.k.a. the salvage value)

Question 24

(expense recognition)
Under IFRS, the residual value of an asset is …

Answer 24

the amount that the company expects to receive upon sale of the asset at the end of its useful life

Question 25

(expense recognition)
generally, alternatives to the straight-line method of depreciation are called

Answer 25

accelerated methods of depreciation

Question 26

(expense recognition)
accelerated methods of depreciation

Answer 26

allocate a greater proportion of the cost to the early years of an asset’s useful life

Question 27

(expense recognition)
accelerated depreciation is sometimes referred to as …

Answer 27

a conservative accounting choice [because it results in lower net income in the early years]

Question 28

(expense recognition)
IFRS state that if a pattern cannot be determined over the useful life, then the __________ must be used.

Answer 28

the straight-line method

Question 29

(expense recognition)
Goodwill and intangible assets with indefinite life are not amortised. Instead, they are ….

Answer 29

[assets that are] tested at least annually for impairment

Question 30

(expense recognition)
Impairment loss

Answer 30

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

Question 31

(expense recognition)
Where is goodwill recorded?

Answer 31

in acquisitions

Question 32

(expense recognition)
Goodwill [definition]

Answer 32

the amount by which the price to purchase an entity exceeds the amount of net identifiable assets acquired