The distinction between recognition and realization is essential to accrual accounting, hence the importance accorded to recognition criteria.Firms recognize items that qualify for inclusion in the financial statements when they enter the financial statements. In the case of value decreases, the firm
A)recognizes the decreases as impairment expenses when it realizes the collection of the reduced cash flows.
B)recognizes the decreases as cost of goods sold when the decreases occur before it realizes the collection of the reduced cash flows.
C)recognizes the decreases as impairment expenses when the decreases occur before it realizes the collection of the reduced cash flows.
D)recognizes the decreases as cost of goods sold when it realizes the collection of the reduced cash flows.
E)None of these answer choices is correct.

Question

Quizplus · Accepted Answer

According to the distinction between recognition and realization, a firm should recognize value decreases as impairment expenses when they occur before it realizes the collection of the reduced cash flows. This is because realization refers to when the cash is actually received or paid, while recognition refers to when the transaction is recorded in the financial statements. In this case, the decrease in value is recognized as an impairment expense, even though the cash flows have not yet been realized. Choice A is incorrect because it implies that the impairment expense is recognized only when the reduced cash flows are realized, which is not accurate. Choice B is incorrect because cost of goods sold does not apply to this scenario. Choice D is incorrect because it implies that the decrease in value is recognized as a cost of goods sold after the cash flows are realized, which is not accurate.

The Distinction Between Recognition and Realization Is Essential to Accrual