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CHAPTER 4:INCOME MEASUREMENT AND OBJECTIVES OF FINANCIAL REPORTING

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School
Department
Business
Course
BUSI 2150U
Professor
Michael Konopaski
Semester
Fall

Description
FINANCIAL ACCOUNTING: A CRITICAL APPROACH CHAPTER 4: INCOME MEASUREMENT AND OBJECTIVES OF FINANCIAL REPORTING REVENUE RECOGNITION:  WHAT IS RECOGNITION? - WHEN REVENUE AND THE RELATED EXPENSES APPEAR ON THE INCOME STATEMENT  GENERALLY “RECOGNITION” IS WHEN A TRANSACTION OR ECONOMIC EVENT IS RECORDED IN AN ENTITY’S ACCOUNTING SYSTEM  TWO APPROACHES: - CRITICAL EVEN APPROACH - GRADUAL APPROACH  CRITERIA UNDER IFRS: - SIGNIFICANT REISKS AND REWARDS TRANSFERRED - NO INVOLVEMENT OR CONTROL - AMOUNT OF REVENUE CAN BE REASONABLY ESTIMATED - COSTS CAN BE REASONABLY ESTIMATED - COLLECTION IS REASONABLE ASSURED  WHEN CRITICAL EVENT OCCURS IT TRIGGERS RECOGNITION OF REVENUE AND MATCHING OF EXPENSES: - DELIVERY OF GOODS OR SERVICES - COMPLETION OF PRODUCTION - CASH COLLECTION - COMPLETITION OF WARRANTY PERIOD OR RIGHT-OF-RETURN PERIOD WHY DOES IT MATTER?  USING DIFFERENT “CRITICAL”EVENTS RESULT IN ECONOMIC CONSEQUENCES FOR STAKEHOLDERS  USERS NEED TO KNOW HOW REVENUE IS RECOGNIZED  THE SELF-INTEREST OF THE PREPARER CAN AFFECT ITS CHOICE WHY DOES GAAP HAVE CHOICES?  TOO COMPLEX TO DEFINE “RULE” FOR EVERY TRANSACTION/SITUATION  NEED TO HAVE ROOM FOR JUDGEMENT  NOT POSSIBLE TO CREATE ABSOLUTE CONSISTENC AND COMPARABILITY GRADUAL APPROACH:  WHEN CRITICAL EVENT APPROACH NOT APPROPRIATE  PERCENTAGE OF COMPLETION METHOD - REVENUE AND EXPENSES RECOGNIZED IN EACH ACCOUNTING PERIOD  COMPLETED-CONTRACT METHOD: - REVENUE AND EXPENSES ONLY RECOGNIZED AT THE END OF THE CONTRACT COST-RECOVERY METHOD:  APPLY WHERE REQUIREMENTS NOT MET, UNDER IFRS  ZERO-PROFIT UNTIL REVENUE RECOGNIZED TO COSTS INCURRED COMPLETED CONTRACT METHOD:  APPLY WHERE PERCENTAGE-OF-COMPLETION METHOD CANNOT BE USED, UNDER GAAP FOR PRIVATE ENTERPRISES EXPENSE RECOGNITION:  MATCH EXPENSES WITH REVENYES  ACCOUNTING
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