What are the three categories of expenses identified in APB Statement 4, and what is the related hierarchy of expense recognition?
What will be an ideal response?
ANSWER:
APB Opinion No. 4 classifies expenses as: (1) costs directly associated with the revenue of the period; (2) costs associated with the period on some basis other than a direct relationship with revenue; and (3) costs that cannot, as a practical matter, be associated with any other period. If possible, costs should be matched against the revenue when directly produced. If a direct cause-and-effect relationship does not exist, costs should be matched to revenue in a traditional and systematic manner. Finally, if there is not even an indirect cause and effect relationship, the costs are recognized as period expenses when incurred.
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