CFSA CHAP 6

It is the process of capturing for inclusion in the financial statements an item that meets the definition of an asset, liability, equity income or expense.

Recognition

The amount at which an asset, a liability or equity is recognized in the statement of financial position is reported as ?

Carrying amount

Recognition links the elements to the ? amd ?.

Statement of financial position and statement of financial performance

The basic principle of income recognition is that income shall be recognized when ?.

earned

It happens simultaneouly with the recognition of a decrease in asset or increase in liability

Recognition of expense

, the recognition of income happens simultaneously with the recognition of an increase in ? or decrease in ?

asset and liability

Give the two recognition criteria

Only items that meet the definition of an asset, a liability or equity are recognized in the statement of financial position.

Similarly, only items that meet the definition of income or expense are recognized in the statement offinancial performance.

T or F: Recognition does focus anymore on how probable economic benefits will flow to or from the entity and that the cost can be measured reliably.

False. It does not focus

T or F: Can an asset or liability and any corresponding income or expense exist even if the probability of inflow or outflow of the benefits is low?

True, they can exist

legal title to the goods passes to the buyer at the ?

point of sale

Under certain condition income may be recognized at the? give the 3.

at the point of production, during production and at the point of collection.

It means that expenses are recognized when incurred.

The expense recognition principle

, the expense recognition principle is the application of the ?

matching principle.

It requires that those costs and expenses incurred in earning a revenue shall be reported in the same period.

matching principle.

The matching principle or expense recognition principle has three applications, namely

a. Cause and effect association

b. Systematic and rational allocation

c. Immediate recognition

Under this principle, the expense is recognized when the revenue is already recognized. The reason is the presumed direct association of the expense with specific income. This principle is actually the strict matching concept.

Cause and effect association

It involves the simultaneous or combined recognition of revenue and expenses that result directly and jointly from the same transactions or events

the matching of cost with revenue

Cause and effect association example

the cost of merchandise inventory.

Such cost is considered as an asset in the meantime that the merchandise is on hand.

When the merchandise is sold, the cost is expensed in the form of cost of goods sold because at such time revenue can now be recognized.

Other examples include doubtful accounts, warranty expense and sales commissions.

Under this principle, some costs are expensed by simply allocating them ouer the periods benefited.

The reason for this principle is that the cost incurred will benefit future periods and that there is an absence of a direct or clear association of the expense with specific revenue.

Systematic and rational allocation

Systematic and rational allocation example are

Concrete examples include depreciation of property, plant and equipment, amortization of intangibles, and allocation of prepaid rent, insurance and other prepayments.

Under this principle, the cost incurred is expensed outright because of uncertainty of future economic benefits or difficulty of reliably associating certain costs with future revenue.

Immediate recognition

An expense is recognized immediately when? give the two

a. When an expenditure produces no future economic benefit.

b. When cost incurred does not qualify or ceases to qualify for recognition as an asset

Immediate recognition example

Examples include officers' salaries and most administrative expenses, advertising and most selling expenses, amount to settle lawsuit and worthless intangibles.

is defined as the removal of all or part of a recognized asset or liability from the slatement of financial position

Derecognition

It normally occurs when an item no longer meets the definition of an asset or a liability.

Derecognition

occurs when the entity loses control of all or part of the asset.

Derecognition of an asset

occurs when the entity no longer has a present obligation for all or part of the liability.

Dereognition of a liability

defined as quantifying in monetary terms the elements in the financial statements.

MEASUREMENT

is the cost incurred in acquiring or creating the asset comprising the consideration paid plus transaction cost.

The historical cost or original acquisition cost of an asset

is the consideration received to incur the liability minus transaction cost.

The historical cost of a liability

the entry price or entry value to acquire an asset or to incur a liability.

historical cost

An application of the historical cost measurement is to measure financial asset and financial liability at what cost?

amortized cost

reflects the estimate of future cash flows discounted at a rate determined at initial recognition.

amortized cost

Four types of current value:

a. Fair value

b. Value in use for asset

c. Fulfillment value for liability

d. Current cost

is the price that would be received to sell an asset in an orderly transaction between market participants at measurement date.

Fair value of an asset

is the price that would paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Fair value of liability

Fair value is the ?

exit price or exit value.

It can be observed directly using market price of the asset or liability in an active market.

Fair value

In cases where fair value cannot be directly measured, an entity can use ?

present value of cash flows.

T or F: Fair value is not adjusted for transaction cost.

True, The reason is that such cost is a characteristic of the transaction and not of the asset or liability.

is the present value of the cash flows that an entity expects to derive from the use of an asset and from the ultimate disposal.

Value in use

T or F: Value in use does include transaction cost on acquiring the asset but includes transaction cost on the disposal of the asset.

False, It does include transaction cost. Note: It’s for assets only

is the present value of cash that an entity expects to transfer in paying or settling a liability.

Fulfillment value

T or F: Fulfillment value does not include transaction cost on incurring a liability but includes transaction cost on fulfillment of a liability.

True

is the cost of an equivalent asset at the measurement date comprising the consideration paid and transaction cost.

Current cost of an asset

is the consideration that would be received less any transaction cost at measurement date.

Current cost of a liability

T or F: current cost is also based on the exit price or exit value but reflects market conditions on measurement date.

False, It is based on entry price or entry value

is the measurement basis most commonly adopted in preparing financial statements

Historical cost