Chapter 17 - Solution Manual

Allocation of cost that will benefit more than one

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Allocation of cost that will benefit more than one accounting period is allowed. According to APB Opinion No. 28 (FASB ASC 270) , the amounts of certain costs are frequently subjected to year-end adjustments even though they can be reasonably approximated at interim dates. To the extent possible such adjustments should be estimated and the estimated costs assigned to interim periods so that the interim periods bear a reasonable portion of the anticipated annual amount. Use of budgeted amounts are normally related to sales projections. Hence, we argue that they provide a reasonable estimate of the relationship to annual sales and thus result in the assignment of costs to interim periods that allow the interim reports to bear a reasonable portion of the anticipated annual results. Team 2 We disagree with the interim accounting approach used by Microsoft. We base our arguments on the discrete view of interim reporting. Proponents of the discrete view believe that each interim period should be treated as a separate accounting period in the same manner as the annual period. Thus, the same principles used to report deferrals, accruals, and estimated items in the annual report would also be employed in preparing interim reports. In accordance with the discrete approach, there generally should be no allocation to other interim periods of expenses incurred in one interim period. Instead, Microsoft should have reported all expenses incurred during the accounting period, rather than reporting budgeted expenses. According to APB Opinion 28 (FASB ASC 270), interim information is essential to provide investors and others with timely information as to the progress of the company. The company should apply the same accounting principles and approaches to an interim report that they do for the annual report. Since companies must report cost incurred during the period in their annual report, it follows that the companies should report cost incurred during the interim period in the interim report. Thus use of the discrete approach wherein the actual expenses incurred during the interim period are reported for that period would allow the investor to see what actually occurred during the interim period and thus the real progress toward year end. Costs incurred during an accounting period that cannot be identified with the activities or benefits of other interim periods should be charged to the interim period in which they were incurred. Advertising costs are incurred in hopes of generating company sales. However, no causal relationship between advertising costs and sales can be established. Since the relationship at best can only be assumed, companies should not arbitrarily assign these costs to interim periods. Debate 17-3 Full Disclosure Investors, creditors and other users of financial statements often argue that there should be more transparency in published financial statements. This argument is based, at least to some extent on concerns that management has too much leeway in the selection of accounting alternatives.
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