Assets are not depreciated on the basis of a decline

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Assets are not depreciated on the basis of a decline in their fair market value, but are depreciated on the basis of systematic charges of expired costs against revenues. (Note to instructor: It might be called to the students’ attention that the FASB does encourage supplemental disclosure of price-level information). (e) Most accounting methods are based on the assumption that the busi-ness enterprise will have a long life. Acceptance of this assumption provides credibility to the historical cost principle, which would be of limited usefulness if liquidation were assumed. Only if we assume some permanence to the enterprise is the use of depreciation and amortization policies justifiable and appropriate. Therefore, it is incorrect to assume liquidation as Gonzales, Inc. has done in this situation. It should be noted that only where liquidation appears imminent is the going concern assumption inapplicable. (f) The answer to this situation is the same as (b). CA 2-6 (a) The economist views business income in terms of wealth of the entity as a whole resulting from an accretion attributable to the whole process of business activity. The accountant must measure the “wealth” of the entity in terms of its component parts, that is, individual assets and liabilities. The events must be identified which cause changes in financial condition of the entity and the resulting changes should be assigned to specific accounting periods. To achieve this identification of such events, accountants employ the revenue recognition principle in the measurement of periodic income. (b) Revenue recognition results from the accomplishment of economic activity involving the transfer of goods and services giving rise to a claim. To warrant recognition there must be a change in assets that is capable of being objectively measured and that involves an exchange transaction. This refers to the presence of an arm’s-length transaction with a party external to
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the entity. The existence and terms of the transaction may be defined by operation of law, by established trade practice, or may be stipulated in a contract. Note that an item should meet four fundamental recognition criteria to be recognized. Those criteria are: (1) Definitions—The item meets the definition of an element of financial statements. (2) Measurability—It has a relevant attribute measurable with sufficient reliability. (3) Relevance—The information is capable of making a difference in user decisions. (4) Reliability—The information is representationally faithful, verifiable, and neutral. In the context of revenue recognition, recognition involves consideration of two factors, (a) being realized or realizable and (b) being earned, with sometimes one and sometimes the other being the more important consideration. Events that can give rise to recognition of revenue are: the completion of a sale; the performance of a service; the production of a standard interchangeable good with a guaranteed market, a determinable market value and only minor costs of marketing, such as precious metals and certain agricultural commodities; and the progress of a construction project, as in shipbuilding. The
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