Case 1

The Financial Accounting Standards Board (FASB) and International Accounting

Standards Board (IASB) have developed a conceptual framework for financial accounting and reporting. The financial reporting department must be familiar with the concepts and principals involved in determining earnings of a company. The amount of net profit or loss reported for a company is dependent on the appropriate recognition, in general, of revenues and expenses for a given financial period. In some cases, costs are recognized as expenses at the time of providing services or sales of goods. In other cases, guidelines have been established for recognizing costs as expenses or losses by other conditions.

Required:

A.Discuss and explain the rationale for recognizing costs as expenses when services are provided and goods are sold. Please provide your opinion on this issue.

B.What are the justifications underlying the convenience of recognizing costs as expenses of a financial period instead of assigning the costs to an asset? Explain and discuss.

C.In what general circumstances would it be appropriate to treat a cost as an asset instead of as an expense? Explain and discuss.

D.According to the conceptual framework, some expenses are assigned to specific financial periods on the basis of systematic and allocation of asset cost over the economic life. Explain and discuss the underlying justification for reporting expenses on the basis of systematic and allocation of the cost of asset.

E.Explain the circumstances under which it would be suitable to treat a cost as a loss in the financial period.