Revenue Recognition and Expense Recognition quiz #3 Flashcards
Revenue Recognition and Expense Recognition quiz #3
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What is the impact of the matching principle on expense allocation?
It requires that expenses be allocated to the periods in which the related revenues are earned. How should a company record the cost of annual insurance paid at the beginning of the year?
The cost is recorded as a prepaid expense and expensed monthly over the year as the benefit is received. What is the effect of recognizing revenue before goods or services are delivered?
It overstates revenue and net income, leading to inaccurate financial statements. How does the matching principle apply to commission expenses?
Commission expenses are recognized in the same period as the related sales revenue. What is the impact of the revenue recognition principle on installment payments?
Revenue is recognized when goods or services are delivered, not as each installment payment is received. How are expenses for assets used up during the period recognized?
They are recognized as expenses in the period the assets are used, matching the expense to the benefit received. What is the purpose of recording expenses when the benefit is received?
To accurately match expenses to the revenues they help generate, ensuring correct financial reporting. How does the revenue recognition principle apply to advance payments for services?
Revenue is recognized as the service is performed, not when the advance payment is received. What is the effect of recognizing expenses only when cash is paid?
It may delay expense recognition and not accurately match expenses to the period in which the benefit is received. How are expenses for goods or services received on account recognized?
They are recognized as expenses when received, with a liability recorded until payment is made. What is the impact of the matching principle on the recognition of payroll expenses?
Payroll expenses are recognized in the period employees work, matching the expense to the period benefited. How does the revenue recognition principle apply to subscription services?
Revenue is recognized over the period the service is provided, not when payment is received. What is the effect of recognizing revenue and expenses on an accrual basis?
It provides a more accurate measure of financial performance by matching revenues and expenses to the correct periods. How are expenses for services received but not yet paid for treated?
They are recognized as expenses when the service is received, with a liability recorded until payment is made. What is the significance of the matching principle for financial statement users?
It ensures that financial statements accurately reflect the costs associated with generating revenue in each period. How does the revenue recognition principle affect the timing of revenue recognition for sales on account?
Revenue is recognized when goods or services are delivered, not when payment is received.
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