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Acct Chap 4 - Chapter 4 Income Measurement and Accrual...

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1 Chapter 4 Income Measurement and Accrual Accounting
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2 Financial Statements = Means of Communication Recognition and Measurement – concepts crucial to success of accounting as a form of communication What economic events should be RECOGNIZED in the financial statements? How should the effects of these events be MEASURED in the statements?
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3 Recognition Process of formally recording item in financial statements as asset, liability, revenue, expense, etc. Inlcludes depicting an item in WORDS and in NUMBERS, with amounts included in financial statement totals.
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4 Measurement Must determine ATTRIBUTE of the property to measure it » e.g. historical cost, current value, etc. Must determine UNIT OF MEASURE » dollar (in the U.S.)
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5    Recognition: formally recording an item in the financial statements of an entity Recognition and Measurement I know I need to record this...    Measurement: quantification of the effects of the item on the entity ...but at current value or historical cost?
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6 Who makes these decisions? THE ACCOUNTANT! Decides what information should be recognized in financial statements Decides how the effects of that information on the entity should be measured
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7 Ethical Considerations The accountant’s primary responsibility is to accurately portray the affairs of the company in the financial statements When to recognize expenses? When to recognize revenue?
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8 The Accrual Basis of Accounting Foundation for measurement of income in modern accounting Differs from the cash basis with respect to TIMING of recognition of revenues and expenses
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9 Cash vs. Accrual Basis
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