Usually segregate operating and nonoperating

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usually segregate operating and nonoperating activities as they offer different insights into com- pany performance and condition. ANALYSIS DECISION You Are the Securities Analyst You are analyzing the performance of a company that hired a new CEO during the current year. The current year's income statement includes an expense labeled "asset write-ofts." Write-ofts repre- sent the accelerated transfer of costs from the balance sheet to the income statement. Are you concerned about the legitimacy of these expenses? Why or why not? [Answer,p. 2-34] ecognition of Revenues and Expenses An important consideration in preparing the income statement is when to recognize revenues and expenses. For many revenues and expenses, the decision is easy. When a customer purchases groceries, pays with a check, and walks out of the store with the groceries, we know that the sale is made and revenue should be recognized. Or, when companies receive and pay an electric bill ith a check, they have clearly incurred an expense that should be recognized. However, should Apple recognize revenue when it sells iPods to a retailer that does not have to pay Apple for 60 days? Should Apple recognize an expense for employees who work this week but will not be paid until the first of next month? The answer to both of these ques- tions is yes. Two fundamental principles guide recognition of revenues and expenses: Revenue Recognition Principle-recognize revenues when earned. Expense Recognition (Matching) Principle-recognize expenses when incurred. These two principles are the foundation of accrualaccounting, which is the accounting system used prepareallGAAP-based fmancial statements.The general approach is this:fITst,recognize revenues in the time period they are earned; then, record all expenses incurred to generate those revenues dur- ing that same time period (this is called matching expenses to revenues). Net income is then correctly reported for that period. Recognizing revenues when earned does not necessarily imply the receipt of cash. Revenue is earned when the company has done everything that it is supposed to do. This means that a sale of goods on credit would qualify for recognition as long as the revenues are earned. Likewise, com- panies recognize an expense when it is incurred, even if no cash is paid. For example, companies recognize as expenses the wages earned by employees, even though they will not be paid until the next pay period. The company records an expense but pays no cash; instead, it records an accrued liability for the wages payable. Accrual accounting requires estimates and assumptions. Examples include estimating how much revenue has been earned on a long-term contract, the amount of accounts receivable that Alert The FASB has released a preliminary draft of a proposal to restructure financial statements to, among other things, better distinguish operating and nonoperating activities.
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will not be collected, the degree to which equipment has been "used up," the cleanup costs that.
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