Income number better reflects profitability and also

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Unformatted text preview: ctivity but are not matched in time with each other o Timing and matching problems with cash flows arise for at least two reasons Our credit economy necessitates that transactions, more often than not, do not involve immediate transfer of cash Costs often are incurred before their benefits are realized. Accrual process - Revenue Recognition and Expense Matching • Revenue recognition - revenues are recognized when both earned and either realized or realizable. o Earned when the company delivers products or services o Realized when cash is acquired for products or services delivered o Realizable - when the company receives an asset for products or services delivered that is convertible to cash • Expense matching - Accrual accounting dictates that expenses are matched with their corresponding revenues. o Product costs - expenses that arise in production of a product or service - recognized when the product is delivered o Cost of goods sold - products sold when they are transferred to the income statement o Period costs - some relate to marketing the product or service and are matched with revenues when the revenues to which they relate are recognized • Short term and long term accruals • Short term accruals - refer to short- term timing differences between income and cash flow. • Long term accruals - arise from capitalization • Capitalization - is the process of deferring costs incurred in the current period whose benefits are expected in future periods. Relevance of Accrual Accounting • Relevance of short- term acrruals o Improve the relevance of accounting by helping record revenues when earned and expenses when incurred. Income number better reflects profitability and also creates current assets and current liabilities that provide useful information about financial condition • Relevance of long- term accruals o To see the import of long term accruals, note t...
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