Expense and Loss Recognition Systematic and Rational Allocation The cost of

Expense and loss recognition systematic and rational

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Expense and Loss Recognition
Systematic and Rational Allocation The cost of assets that benefit more than one period, such as buildings, equipment, patents, and prepaid insurance, are spread across the periods of expected benefit in some systematic and rational way (usually through depreciation, amortization, or depletion). Expense and Loss Recognition
Immediate Recognition Many expenses are not related to specific revenues but are incurred to obtain goods and services that indirectly help to generate revenues. Examples include office salaries, utilities, and general advertising. These are recognized as expenses in the period in which they are incurred. Expense and Loss Recognition
ADDITIONAL MATERIAL SPECIAL TOPICS CONCERNING THE BALANCE SHEET AND THE INCOME STATEMENT
Asset Impairment The concept of impairment applies only to noncurrent assets. An impairment occurs when the carrying amount of a noncurrent asset exceeds the higher of (a) un discounted future cash flows or (b) FMV. Impairments are situations in which the carrying amount (salvage value + depreciation/amortization yet to be taken) of a noncurrent asset is higher than the FMV of the asset if it were sold today. When a non-current asset is deemed to be impaired, the asset should be written down to a new carrying amount and the impairment loss is recognized in the income statement. Once impairment has been recognized it cannot be restored.
Departures from Historical Cost Impairments of non-current assets to write down assets to the lower of historical cost or FMV. Reducing accounts receivables to “net realizable” value by creating an allowance for doubtful accounts. Realizing other comprehensive income to capture shifts in market values of trading securities and foreign currency. Depreciating tangible assets. Amortizing intangible assets.
FORMS OF FINANCIAL STATEMENTS Interim financial statements present the results of operations for a period less than one full cycle. Comparative financial statements present several years’ financial statements side by side. This enables users to analyze performance over multiple periods and identify significant trends. Consolidated financial statements combine the financial results of the “parent company” with other companies that it owns, called subsidiaries . Pro Forma financial statements restate the GAAP financial statements by adjusting for one or multiple assumptions or what-if scenarios. Forecasted financial statements indicate how fast the company is expected to grow by forecasting the general volume of activity (sales, expenses, income) expected in the future.
Example of Forecasted Income Statement
Changes in Accounting Principles Occasionally a company will change an accounting principle because a change in economic conditions suggests that an accounting change will provide better information or because the FASB issues a new pronouncement requiring a change in principle.

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