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2. Companies may initially credit revenues received in cash before being
recognized to a revenue account instead of a liability account. The
adjusting entry requires recording a liability for the portion still to be
recognized and debiting the revenue account so that its balance will
reflect the amount recognized.
*G. Discuss Financial Reporting Concepts.
1. To be useful, information should possess two fundamental qualities:
relevance and faithful representation.
decision scenario, it is relevant.
b. Accounting information is considered relevant if it provides information
that has predictive value – helps provide accurate expectations about
expectations.
c. Materiality is a company-specific aspect of relevance. An item is
material when its size makes it likely to influence the decision of an
investor or creditor.
(1) complete—nothing important has been omitted,
(2) neutral—is not biased toward one position or another, and
(3) free from error.
2. Enhancing Qualities – include comparability, consistency, verifiability,
timeliness, and understandability.
principles.
(1) To make a comparison, companies must disclose the
accounting methods used.
and methods from year to year.
c. Verifiable—quality of information that occurs when independent
measures obtain similar results.
loses its capacity to influence decisions.
e. Understandability—information presented in a clear fashion so
that users can interpret it and comprehend its meaning.
4. Economic Entity Assumption
Every economic entity can be separately identified and accounted for.
Economic events can be identified with a particular unit of accountability.
operation for the foreseeable future.
7. Measurement Principles – GAAP generally uses one of two measurement
principles: the historical cost principle or the fair value principle.
3-12 Copyright © 2013 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 11/e, Instructor’s Manual (For Instructor Use Only)
a. Historical Cost Principle – requires assets to be recorded at original
cost because that amount is verifiable.
b. Fair Value Principle – requires that assets and liabilities should be
reported at fair value (the price received to sell an asset or settle a
liability).
8. Full Disclosure Principle – requires that all circumstances and events
disclosed.
9. Cost Constraint – determining whether the cost that companies will
incur to provide the information will outweigh the benefit that financial
statement users will gain from having the information available.
IFRS
A Look at IFRS
It is often difficult for companies to determine in what time period they should
report particular revenues and expenses. Both the IASB and FASB are working
on a joint project to develop a common conceptual framework, as well as a
revenue recognition project, that will enable companies to better use the same
principles to record transactions consistently over time.
KEY POINTS
In this chapter, you learned accrual-basis accounting applied under GAAP.
the period in which events occur.
Similar to GAAP, cash-basis accounting is not in accordance with IFRS.
IFRS also divides the economic life of companies into artificial time periods.
Under both GAAP and IFRS, this is referred to as the time period
assumption.
statements, including comparative information annually.
The general revenue recognition principles required by GAAP that are used
in this textbook are similar to those under IFRS.
Revenue recognition fraud is a major issue in U.S. financial reporting. The
same situation occurs in other countries, as evidenced by revenue
permitted under GAAP.
The terminology used for revenues and gains, and expenses and losses,
differs somewhat between IFRS and GAAP. For example, income under
IFRS is defined as:
Increases in economic benefits during the accounting period in the form
from shareholders.
Income includes both revenues, which arise during the normal course of
operating activities, and gains, which arise from activities outside of the
shareholders.
Note that under IFRS, expenses include both those costs incurred in the
normal course of operations, as well as losses that are not part of normal
operations. This in contrast to GAAP, which defines each separately.
LOOKING TO THE FUTURE
accounting in this area.
20 MINUTE QUIZ
Circle the correct answer.
True/False
1. Since companies find it desirable and necessary to report the results of their activities
be divided into artificial time periods.
True False
2. The revenue recognition principle requires that companies recognize revenue in the period
True False
True False
4. Payments of expenses that will benefit more than one accounting period are referred to
as prepaid expenses.
True False
5. Cost less accumulated depreciation is a measurement of the current value of an asset
such as equipment or a building.
True False
6. Depreciation is the process of allocating the cost of an asset to expense over its useful
life in a rational and systematic manner.
True False
7. The adjusting entry for unearned revenues results in a debit to an asset account and a
credit to a revenue account.
True False
8. A contra-asset account is an account whose balance is deducted from a related asset in
the financial statements.
True False
9. When accrual-basis accounting is applied, adjusting entries are not necessary.
True False
3-16 Copyright © 2013 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 11/e, Instructor’s Manual (For Instructor Use Only)
10. Adjustments for accrued expenses are necessary to record the obligations that exist at
the balance sheet date and to recognize the expenses that are applicable to the current
accounting period.
True False
Multiple Choice
1. The recording of salaries and wages earned but not yet paid is an example of an
adjustment that
a. recognizes an accrued expense.
b. recognizes an unrecorded revenue.
c. apportions revenues between two or more periods.
d. apportions costs between two or more periods.
2. A list of the accounts and their balances after all adjustments have been made is known as
a. adjusting entries.
b. adjusted trial balance.
c. book values.
d. accrued accounts.
3. Prior to recording adjusting entries, revenues exceed expenses by $60,000. Adjusting
a. $60,000.
b. $50,000.
c. $40,000.
d. none of the above.
4. The adjustment for depreciation is an example of
a. recognizing an accrued expense.
d. recognizing an unrecorded revenue.
5. Most businesses choose fiscal years which correspond to
a. the calendar year.
b. any twelve-month period.
c. their natural business year.
d. any of the above.
ANSWERS TO QUIZ
True/False
Multiple Choice
