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Chapter 2: 18Q (page 61)
Briefly describe the fair value hierarchy.
The fair value hierarchy differentiates the assets and liabilities that are traded in an active market from those that do not.
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CA2-7 (Expense Recognition Principle) 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.
Instructions
(a) List three criteria that can be used to determine whether such costs should appear as charges in the income statement for the current period
.(b) As generally presented in financial statements, the following items or procedures have been criticized as improperly recognizing costs. Briefly discuss each Item from the viewpoint of matching costs with revenues and suggest corrective or alternative means of presenting the financial information.
(1) Receiving and handling costs.
(2) Cash discounts on purchases.
ETHICS (Expense Recognition Principle) Anderson Nuclear Power Plant will be "mothballed" at the end of its useful life (approximately 20 years) at great expense. The expense recognition principle requires that expenses be recognized as assets are used up or liabilities are incurred. Accountants Ana Alicia and Ed Bradley argue whether it is better to allocate the expense of mothballing over the next 20 years or ignore it until mothballing occurs.
Instructions
Answer the following questions.
(a) What stakeholders should be considered?
(b) What ethical issue, if any, underlies the dispute?
(c) What alternatives should be considered?
(d) Assess the consequences of the alternatives.
(e) What decision would you recommend?
Briefly describe the two fundamental qualities of useful accounting information.
Do the IASB and FASB conceptual frameworks differ in terms of the role of financial reporting? Explain.
Explain how you would decide whether to record each of the following expenditures as an asset or an expense. Assume all items are material.
a) Legal fees paid in connection with the purchase of land are \(1,500.
b) Eduardo, Inc. paves the driveway leading to the office building at a cost of \)21,000.
c) A meat market purchases a meat-grinding machine at a cost of \(3,500.
d) On June 30, Monroe and Meno, medical doctors, pay 6 months' office rent to cover the month of July and the next 5 months.
e) Smith's Hardware Company pays \)9,000 in wages to laborers for construction on a building to be used in the business.
f) Alvarez's Florists pays wages of $2,100 for the month an employee who serves as driver of their delivery truck.
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