The Revenue Recognition and Asset Valuation Methods Specified in AAS

question 56

Multiple Choice

The revenue recognition and asset valuation methods specified in AAS 25 are likely to increase the volatility of reported earnings.This is because:

• A) Revenue is to be recognised when it is received and depreciation is to be calculated on a units of usage basis.
• B) The short-term variation in market prices of assets intended to be held long-term are reported as revenues or expenses each year.
• C) The asset valuation is to be based on the lower of cost and net realisable value, so that there are often lump-sum write-offs to the income statement.
• D) Preparers of accounts for superannuation plans argue that the revenues should be smoothed over a 7-year period rather than all reported as earned in a period.
• E) None of the given answers.

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Definitions:

Marginal Cost

The change in total production cost that comes from making or producing one additional unit.

Shut Down

A short-term decision by a firm to cease operations and production when the market price is below its variable costs, to minimize losses.

Economic Loss

A situation where total costs exceed total revenues, leading to a negative economic profit.

AVC

Average Variable Cost, an economic metric reflecting the variable costs (such as labor and materials) per unit of output.