Accountants try to prepare income statements that are as accurate as possible. A

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.

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 receiving and handling costs from the viewpoint of matching costs with revenues and suggest corrective or alternative means of presenting the financial information

C. 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

Explanation / Answer

A) The costs and revenues resulting from typical business operations of a period must be matched with each other. The three criteria to determine the costs to be charged to a particular period are:

1. All the benefits of the cost incurred has been drawn in the period.

2. All the period cost should be charged to that period only.

3. Whether billing of incurring cost is made on the date of the concerned period.

B) The receiving and handling costs are incurred at the godown/warehouse towards loading and unloading of inventory. These costs are usually treated as the period costs and charged to the period in which these are incurred. Alternately, the "receiving and handling costs" can be charged to the period in which the related inventory is sold out.

C) The cash discounts on purchases is a revenue which we receive on making early payment for the inventory purchased and ultimately it makes our purchases cheaper. These costs are credited to the purchases to have net purchase costs. Alternately, these costs could be charged to that period in which the purchased inventory is sold out.

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