Chapter 6
1. Process of capturing for inclusion in the financial statements an item that meets the definition of
an asset, liability, equity, income, or expense.
2. Only items that meet the definition of an asset, a liability or equity are recognized in the
statement of the financial position. Similarly, only items that meet the definition of income or
expense are recognized in the statement of financial performance. Iin addition to meeting the
definition of an element, items are recognized only when their recognition provides users of
financial statements with information that is both relevant and faithfully represented.
3. Derecognition is defined as the removal of all part of a recognized asset or liability from the
statement of financial position
4. The basic principle of income recognition is that income shall be recognized when earned. With
respect to sale of goods in the ordinary course of business, the point of sale is unquestionably
the point of income recognition.
5. a. Cause and effect association
b. Systematic and rational allocation
c. Immediate recognition
6. Under the cause-and-effect association, the expense is recognized when the revenue is already
recognized. The reason is the presumed direct association of the expense with specific income.
The cause-and-effect association principle is actually the strict matching concept.
7. Under systematic and rational allocation, some costs are expensed by simply allocating them
over the periods benefited. When economic benefits are expected to arise over several
accounting periods and the association with income can only be broadly or indirectly
determined, expenses are recognized on the basis of systematic and allocation procedures.
8. Under this principle, the cost incurred is expensed outright because of uncertainty of future
economic benefits or difficulty of reliably associating certain costs with future revenue.
9. A. Historical Cost
B. Current Value
10. The historical cost of an asset is the cost incurred in acquiring or creating the asset comprising
the consideration paid plus transaction cost.
11. Fair value of an asset is the price that would be received to sell an asset in an orderly transaction
between market participants at measurement date.
Fair value of a liability is the price that would pay to transfer a liability in an orderly transaction
between market participants at the measurement date.
12. Value in use is the present value of the cash flows that an entity expects to derive from the use
of an asset and from the ultimate disposal.
13. Fulfillment value is the present value of cash that an entity expects to transfer in paying or
settling a liability.
14. Current cost of an asset is the cost of an equivalent asset at the measurement date comprising
the consideration paid and transaction cost.
Current cost of a liability is the consideration that would be received less any transaction cost at
measurement date.
15. In selecting a measurement basis of an asset or a liability and for the related income and
expense, it is necessary to consider the nature of the information that the measurement basis
will produce.
To achieve this, the information must be both relevant and faithfully represented.
V
Chapter 7
1. The presentation and disclosure can be effective communication tool about the information
in financial statements. A reporting entity communicates information about its assets,
liabilities, equity, income, and expenses by presenting and disclosing information in financial
statements.
2. Hhhh
3. Income and expenses are classified as components of profit loss and components of other
comprehensive income.
4. Aggregation is the adding together of assets, liabilities, equity, income, and expenses that
have similar or shared characteristics and are included in the same classification.
5. The financial performance of an entity is determined using two approaches, namely
transaction approach and capital maintenance approach.
6. Shareholders invest in entity to earn a return on capital or an amount in excess of their
original investment. On the other hand, the return on capital is an erosion of the capital
invested in the entity.
7. Financial capital is the monetary amount of the net assets contributed by shareholders and
the amount of the increase in net assets resulting from earnings retained by the entity.
8. Under financial capital concept, net income occurs when the nominal amount of the net
assets at the end of the year exceeds the nominal amount of the net assets at the beginning
of the period, after excluding distributions to and contributions by owners during the
period.
9. Physical capital is the quantitative measure of the physical productive capacity to produce
goods and services.
10. Under physical capital concept, net income occurs when the physical productive capital of
the entity at the end of the year exceeds the physical productive capital at the beginning of
the period, also after excluding distributions to and contributions from owners during the
period.