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Chapter 12 is intended to be a comprehensive overview of the income statement.
focus is not on detailed issues; rather, fundamental questions of element definitions, recognition,
and measurement are examined.
The amount of time spent on this chapter will depend on the
background of the class and the instructor’s interests.
At one level, considerable time could be
spent reviewing each area covered, in effect recasting intermediate accounting topics in a more
Alternatively, the chapter could be examined more for broad generalities.
For 50 years the primary theoretical thrust to the measurement and recognition of income has
been a revenue-expense approach rather than an asset-liability approach.
however, the FASB appears to be changing that emphasis.
Definitions of comprehensive
income, revenues, and expenses contained in SFAC No. 6 clearly reflect that change.
will be several more years, however, before that change in emphasis will have an impact upon
the income statement, because the statement is a product of 50 years of accounting standards
based on the revenue-expense approach.
Accounting theory regarding the recognition of revenue provides accounting practice some
practical guidance in that it states that revenue should be recognized when the earning process is
Unfortunately, the completion of the earnings process frequently does not coincide
with the time that objective measurements of the amount of revenue can be made.
As a result,
we find that revenue is recognized on the income statement at different times in different
industries, even though the underlying circumstances surrounding the event giving rise to the
revenue are identical or at least similar.
The chapter points out several examples, such as
revenue recognition when right of return exists and transfers of receivables with recourse, where
inconsistencies exist today and why they were allowed to evolve.
Future events is going to be a very difficult area to maneuver through, and we are just starting to
think about it systematically.
Future events are, of course, related to future contingencies under
But we would still be facing the future events problem in rigid uniformity
If, for example, rigid uniformity were going to be used on an industry basis for
depreciation accounting, issues of years-of-life and salvage values, both future events, would
have to be faced.
In general, accounting theory regarding expense recognition, i.e., matching, provides no practical
guidance as to the timing or amount of expense to be recognized on the income statement.
Basically, expenses should be recognized when the benefits from those expenses are received;