Periodicity: Accounting periods can be any length. Annual periods are usually the longest and most common. Quarterly or interim reports are common among large publicly traded firms; while weekly reports of sales or expenses are common for internal management purposes. The

Conservatism: The notion that when a choice is available on how to account for a transaction or event accounting will choose the alternative which lowers or defers income recognition or increases expenses. Example Lower of Cost or Market for inventory valuation. If inventory values fall below their original cost we will recognize the loss in the period of decline, while, deferring any appreciation in value until the inventory is sold. If revenue is collected in advance such as subscription revenue:

When should a company recognize revenue and match the corresponding costs

Issues: Magazine Subscriptions, Newsweek receives a one-year subscription for $52. If the moneys are collect on Sept 1, 1999 how much of the $52 should be treated as revenue in 1999 and how much is any in the year 2000?

Answer:

(Hint) 9/1/99 Cash            52

Unearned Revenue            52

The Realization concept: Revenue is recognized when it is realized. As we saw in the unearned income example we do not recognize revenue when we have not completed the service for which the revenue was intended.

The matching concept attempts to associate benefits which effort. A number of issues develop as we attempt to defer efforts or postpone benefits in order to correctly measure the revenue and expenses of a business.

Movie industry: All the costs are incurred before any of the revenue is realized.

Insurance Industry: collects all the premiums on policies before costs of protection are incurred.

When is the proper time for recognition? When the earnings process is complete.

Accounting follows a convention of conservatism. We will more likely defer revenue until we are sure about costs. Conversely, expenses may be recognized even when the revenue is not assured. Example: Research and Development Costs. R&D is generally expensed as incurred even though we anticipate the efforts culminating in revenues.

Accrual Accounting: focuses on the economic event (exchange of good and services) rather than the exchange of cash. We will defer recognizing revenue until the costs have been expensed.

In order for these concepts to be useful they must be consistently applied. Therefore we attempt to measure the same events the same way both over time and across firms.

The concepts applied to material situations, immaterial a level which reasonable users would not can a decision allows us to expense small assets even if the theory says they have future economic benefit.

The income statement measures flows of resources in and out of the firm. Revenue is an inflow of resources resulting from the productive process, while expenses are outflows of resources resulting from the productive process. Gains and Losses are similar except that they do not result from productive processes. After matching revenues and expenses, gains and losses we derived net income. Net income is a concept which relates to a return on shareholder investment. Essentially, investors buy stock to earn a return. Net Income is that return. Dividends is when we distribute assets of the company to its' shareholders. It is not a distribution of net income and not an expense of doing business.