In Relation to the Concept of Recognition of an Item

question 13

Multiple Choice

In relation to the concept of recognition of an item in the financial statements:

• A) Items of equity must satisfy both the probability and measurement criteria before they can be recognised.
• B) Assets can only be recognised where there is a high probability of future economic benefits flowing to the entity.
• C) Expenses are recognised when a decrease in a future economic benefit related to an increase in an asset or a decrease in a liability has arisen that can be measured reliably.
• D) For items to qualify for recognition in the financial statements as liabilities or income they must first satisfy the definition of an element, and then meet both the probability and measurement requirements in relation to recognition.

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Definitions:

Component Cost

The cost related to each source of capital, such as debt and equity, that a company uses for funding.

Preferred Stock

A class of ownership in a corporation that has a higher claim on assets and earnings than common stock, usually with fixed dividends.

Cost of Retained Earnings

The opportunity cost for shareholders for having the company retain the earnings instead of distributing them, often considered in investment and dividend decisions.

Risk Free Rate

The theoretical rate of return of an investment with zero risk of financial loss, often represented by the yield on government bonds.