Financial Reporting: Its Conceptual Framework C2-5 Cost and Expense Recognition: 1. Explain the rationale for recognizing costs as expenses at the time of product sale. • Some costs are recognized as expenses in direct association with specific revenue. This association is called “cause and effect or matching concept” (Nikolai, et.al. 2010, p. 56). The cause and effect relationship cannot always be demonstrated definitively. Therefore we recognize them as expenses that accompany recognition of the revenue. Some expenses are advanced (accrued) or delayed (deferred) in a manner similar to revenues. The reasoning is to “match sacrifices against benefits in the appropriate accounting period” (Nikolai, et.al. 2010, p. 56). Some expenses associated by cause and effect are sales commissions and the product costs included in costs of goods sold. 2. What is the rationale underlying the appropriateness of treating costs as expenses of a period instead of assigning the costs to an asset?
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