Question

Accountants try to prepare income statements that are as accurate as possible. A basic requirement in preparing accurate income statements is to record costs and revenues properly. Proper recognition of costs and revenues requires that costs resulting from typical business operations be recognized in the period in which they expired.

1. List three criteria that can be used to determine whether such costs should appear as charges in the income statement for the current period.

2.As generally presented in financial statements, the following items or procedures have been criticized as improperly recognizing costs. Briefly discuss receiving and handling costs from the viewpoint of matching costs with revenues and suggest corrective or alternative means of presenting the financial information.

3.As generally presented in financial statements, the following items or procedures have been criticized as improperly recognizing costs. Briefly discuss cash discounts on purchases from the viewpoint of matching costs with revenues and suggest corrective or alternative means of presenting the financial information.

Answer 1

1. The costs and incomes coming about because of common business tasks of a period must be coordinated with one another. The three criteria to decide the expenses to be charged to a specific period are:

1: All the advantages of the costs acquired has been drawn in the period.

2: All the period cost ought to be charged to that period as it were.

3: Whether charging of bringing about expense is made on the date of the concerned period.

2. The receiving and handling care of expenses are acquired at the godown/distribution center towards stacking and emptying of stock. These expenses are generally treated as the period expenses and charged to the period in which these are brought about. On the other hand, the "getting and dealing with expenses" can be charged to the period in which the related stock is sold out.

3. The cash discounts on buys is an income which we get on making early installment for the stock acquired and eventually it makes our buys less expensive. These expenses are attributed to the buys to have net buy costs. On the other hand, these expenses could be charged to that period in which the bought stock is sold out.