Question

Identify the correct principle for each of the following activities using the drop-down list.

Identify the correct principle for each of the following activities using the drop-down list. Items Activities Item #1 Item #2 Principle A company records the expenses incurred to generate the revenue reported. Revenue is recognized when goods are provided to the customer at the amount expected to be received. A company reports the details behind financial statements that would impact user's decisions. Accounting information is based on actual cost. Item #3 Item #4 Expense recognition principle Full-disclosure principle Measurement principle Revenue recognition principle

Answer 1

Accounting principles are the rules and guidelines that companies must follow when reporting financial data. The Financial Accounting Standards Board (FASB) issues a standardized set of accounting principles in the U.S. referred to as generally accepted accounting principles (GAAP).

Item 1
A company records the expenses incurred to generate the revenue reported.

Correct Principle - Expense recognition principle.
The expense recognition principle states that expenses should be recognized in the same period as the revenues to which they relate. According to the matching principle, expenses should be recognized in the same period as the related revenues. If expenses are recorded as they are incurred, they may not match the revenues that they relate to.

Item 2.
Revenue is recognized when goods are provided to the customer at the amount expected to be received.

Correct Principle - Revenue recognition principle.
The revenue recognition principle using accrual accounting requires that revenues are recognized when realized and earned–not when cash is received. Revenue realized during an accounting period is included in the income of the same period. The revenue recognition principle is a cornerstone of accrual accounting together with the matching principle.

Item 3
A company reports the details behind financial statements that would impact user's decision.

Correct Principle - Full disclosure principle.
The full disclosure principle requires a company to provide the necessary information so that people who are accustomed to reading financial information are able to make informed decisions regarding the company. The disclosures required under this principle can be found in a number of places, like, the company's financial statements including the notes to the financial statements and supplementary schedules, quarterly earnings reports, press releases and other communications.

Item 4
Accounting information is based on actual cost.

Correct Principle - Measurement principle.

Accounting measurement is the computation of economic or financial data in terms of money, hours, or other units. The measurement concept states that a business should only record an accounting transaction if it can be expressed in terms of money. The method used in accounting measurement helps compare and evaluate accounting data. When a company uses standard accounting measurements, it becomes easier to compare certain variables over specific time frames and therefore allows a company to better understand how it operates. This could include units sold, unit revenues, hours worked, cost per hour, etc.