Exercise 6-9

An analyst must be familiar with the concepts involved in determining income. The amount of in- come reported for a company depends on the recognition of revenues and expenses for a given time period. In certain cases, costs are recognized as expenses at the time of product sale; in other situations, guidelines are applied in capitalizing costs and recognizing them as expenses in future periods.

Required:

a. Explain the rationale for recognizing costs as expenses at the time of product sale.

b. What is the rationale underlying the appropriateness of treating costs as expenses of a period instead of assigning the costs to an asset? Explain.

c. Under what circumstances is it appropriate to treat a cost as an asset instead of as an expense? Explain.

d. Certain expenses are assigned to specific accounting periods on the basis of systematic and rational allocation of asset cost. Explain the underlying rationale for recognizing expenses on this basis.

e. Identify the conditions necessary to treat a cost as a loss