Issues in Accounting

Paper Summary:

This paper explains that expenses are recognized in the same period in which the benefits derived from those costs are recognized (the matching principle) and, thus, recognition of expenses is dictated by revenue recognition; therefore, associations between revenues and costs must be established. The author points out the pros of expensing options include providing a level playing field so that companies, which use cash bonuses, and companies, which use stock options, each have an expense on the income statement; however, there are many significant challenges for a company that expenses options. The paper recommends that manufacturing companies use accrual basis accounting and follow GAAP guidelines for revenue and expense recognition and, with regards to expensing stock options, the company might explore the use of stock awards instead of stock options.

Table of Contents
Introduction
Revenue and Expense Recognition Methods
Expensing of Stock Options
Recommendations

From the Paper:

"The revenue recognition and matching principles mentioned above are used under the accrual basis of accounting. Under cash-basis accounting, revenue is recorded only when cash is received, and expenses are recorded only when paid. However, GAAP requires accrual basis accounting because the cash basis often causes misleading financial statements. With accrual basis, revenue must be recognized in the accounting period in which it is earned, not just when money is exchanged."

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