An accountant must be familiar with the concepts involved indetermining earnings of a company. The amount of earnings reportedfor a company is dependent on the proper recognition, in general,of revenue and expense for a given time period. In some situationscosts are recognized as expenses at the time of product sale; inother situations guidelines have been developed for recognizingcosts as expenses or losses by other criteria.
1. Explain the rationale for recognizing costs as expenses at thetime of product sale.
2. What is the rationale underlying the appropriateness of treatingcosts as expenses of a period instead of assigning the costs to anasset? Explain.
3. Some expenses are assigned to specific accounting periods on thebasis of systematic and rational allocation of asset cost. Explainthe underlying rationale for recognizing expenses on thisbasis.