IX. Using the information from the text

1. Give the definition of “income”.

2. Explain the conditions for recognition of income.

3. Distinguish between revenue estimates and expense estimates.

Unit XIV

Measurement Principles

Net Income

Part II

Grammar: Impersonal Sentences

Wordlist

allowance	знижка, уцінка	скидка, уценка
anticipate	чекати, передбачати	ожидать, предвидеть
available	наявний, доступний	наличный, доступный
batch	партія виробів, замовлення	партия изделий, заказ
beginning inventory	запас товарно-матеріальних цінностей на початок року	запас товарно-материальных ценностей на начало года
declining-charge depreciation	дeгресивне нараховування	дeгрессивное начисление износа
ending inventory	запас товарно-матеріальних цінностей на кінець року	запас товарно-материальных ценностей на конец года
evidence	дані, факти, доказ	данные, факты, доказательство
give up	відмовлятися	отказываться
gradually	поступово	постепенно
inventory	інвентаризаційний опис, наявні вироби, запас	инвентаризационная опись, наличные товары, запас
predict	завбачати, передрікати	предсказывать, прогнозировать
reasonable	розумний, обґрунтований	разумный, обоснованный
recognize	визнавати, схвалювати	признавать, одобрять
straight-line depreciation	рівномірне нараховування	равномерное начисление износа

I. Read the text and try to explain the concepts “straight-line depreciation” and “declining-charge depreciation”.

Some assets give up their services gradually rather than all at once. The cost of the portion of these assets the company uses to produce revenues in any period is that period's depreciation expense, and the amount shown for these assets on the balance sheet is their historical cost less an allowance for depreciation, representing the cost of the portion of the asset's anticipated lifetime services that has already been used. To estimate depreciation, the accountant must predict both how long the asset will continue to provide useful services and how much of its potential to provide these services will be used up in each period.

Depreciation is usually computed by some simple formula. The two most popular formulas in the United States are straight-line depreciation, in which the same amount of depreciation is recognized each year, and declining-charge depreciation, in which more depreciation is recognized during the early years of life than during the later years, on the assumption that the value of the asset's service declines as it gets older.

The role of the independent accountant (the auditor) is to see whether the company's estimates are based on formulas that seem reasonable in the light of whatever evidence is available and whether these formulas are applied consistently from year to year. Again, what is "reasonable" is clearly a matter of judgment.

Depreciation is not the only expense for which more than one measurement principle is available. Another is the cost of goods sold. The cost of goods available for sale in any period is the sum of the cost of the beginning inventory and the cost of goods purchased in that period. This sum then must be divided between the cost of goods sold and the cost of the ending inventory:

Beginning inventory Cost of goods sold

+ = +

Purchases Ending inventory

Accountants can make this division by any of three main inventory costing methods: (1) first in, first out (FIFO) ¹, (2) last in, first out (LIFO) ² or (3) average cost. The LIFO method is widely used in the United States, where it is also an acceptable costing method for income tax purposes; companies in most other countries measure inventory cost and the cost of goods sold by some variant of the FIFO or average cost methods. Average cost is very similar in its results to FIFO.

NOTES:

1. FIFO – first in, first out - метод оценки запасов по ценам последних закупок, правило обслуживания в порядке поступления.

2. LIFO – last in, first out - метод оценки запасов по ценам первых закупок, правило обслуживания в обратном порядке.