(L.O. 8) A development stage enterprise should use the same generally accepted accounting principles that apply to established operating enterprises for:

Recognition Recognition of Revenue of Expenses

a. Yes Yes

b. No No

c. No Yes

d. Yes No Explanation: The FASB indicates that the accounting practices and reporting standards should be no different for an enterprise trying to establish a new business than they are for other enterprises. Thus, the

“same generally accepted accounting principles that apply to established operating enterprises shall govern the recognition of revenue by a development stage enterprise (DSE) and shall determine whether a cost incurred by a DSE is to be charged to expense when incurred or is to be capitalized or deferred.”

This means that items constituting preoperating costs should be expensed unless the same costs would be deferred by an established business; the fact that the costs are incurred before the entity has any significant revenue earned is not by itself justification for deferral of such costs. Treating preoperating costs as expenses often results in the reporting of an operating loss in the year of start up of a new entity.

(Solution = a.)