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Flashcards in Costs and Expenses Deck (13):
1

What is a cost?

Costs are the economic sacrifices incurred by firms for goods and services used in their business. Costs are measured at the cash equivalent or fair value of consideration transferred, or liability assumed, for the good or service.

Losses provide no benefit to the primary operations of the entity. Losses are incidental to the primary operations

2

What is an expense?

Expenses are outflows of resources that are incurred in production or other activities central to the ongoing primary operations of the entity

3

What is a deferral?

When cash payments precede expense recognition, an asset typically is recorded because payment of the good or service occurs before its use in the business. Over the period of the asset's benefit, an expense is recognized

4

What is an accrual?

When expenses precede cash payments, a liability typically is recorded. The liability is paid at a later date. The service or good is received and used before payment

5

How do you account for advertising costs?

Advertising costs include the costs of content production and communicating that content.

The general principle is that advertising costs are either (1) expensed as incurred or (2) when the advertising first occurs

6

What are property taxes?

Property taxes are levied by state and local governments based on the assessed valuation of property as of a given date. The tax becomes a lien against the property on the date specified by law and thus legally the liability comes into existence on that date. From the perspective of the taxing authority, property taxes do not "accrue" over time. The fiscal periods of the taxing authority and the firm paying the tax (the property owner) often do not coincide.

7

When are taxes expensed?

The tax-paying firm accrues the property tax monthly as expense over the fiscal year of the taxing authority because the expense should be recognized in the same period the firm benefits from the services provided by the governmental unit (taxing authority).

8

Does IFRS allow the capitalization of direct response advertising expenses?

No - must be expensed as incurred.

9

What are compensated absences?

Compensated absences include vacation, holiday and sick leave periods for which the employee is compensated. GAAP requires that accrual accounting be applied if certain criteria are met. The expense of these benefits is accrued during the period employees earn these benefits if all of the following four criteria are met:
1. The obligation is attributable to services rendered as of the balance sheet date;
2. The rights vest (benefits are no longer contingent on continued employment) or accumulate (carry over to future periods);
3. Payment of the obligation is probable;
4. The amount of the obligation is estimable.

10

Do all compensated absences accrual?

Some benefits do not require accrual. For example, some holiday pay benefits, military leave and maternity leave benefits do not accumulate if the employee does not use these benefits

11

What is vesting?

Vesting is more valuable to the employee than accumulation because the employee can leave the firm and be paid the benefits if they are vested

12

What happens to accrual rates when there is a pay raise?

If current rates are used for the accrual, and a pay raise is enacted between the accrual of the expense and its payment, the effect of the raise is treated as a change in estimate and is recognized currently and prospectively, retroactive application does not apply.
The liability is not discounted but rather is reported at nominal (future) value.

13

Are sick pay benefits accrued?

Accumulated sick pay benefits need not be accrued (but may be) because the event causing payment (illness) cannot be predicted. However, if unused sick pay benefits are routinely paid to employees (for example, upon leaving the firm), then accrual is required because in this case the benefits vest.