Question

The "matching principle" refers to?

a. Making sure assets equal liabilities plus equity on the balance sheet

b.Matching costs with associated revenues to determine profits

c.Matching sales to the correct advertising campaign

d.Matching current liabilities to current assets on the balance sheet

Which of the following statements regarding depreciation is false?

a.Depreciation is a method of spreading the cost of an item over its useful life

b.Depreciation is a non-cash expense

c.Depreciating an investment faster will result in better cash flow.

d.A company that wants to increase its reported income would depreciate a purchase over a longer time than a company that wants to lower its income and reduce tax burden

e.Most capital expenditures are depreciated

If a company needs cash they can (choose the correct answer)

a.Get a loan

b.find more investors

c.Tighten up operations(negotiate better terms with vendors, tighter inventory, better collections)

d. all of the above.

Answer 1

Answers -

1. Answer to this question is (b) Matching costs with associated revenues to determine profits.
The reason is Matching concept states that for a particular period revenue and expense should be reported clearly or should be matched so as to determine the correct income/loss position for the company. The other options are not related to matching concept therefore answer is option(b).

2. Answer to this question is (c) Depreciating an investment faster will result in better cash flow.
The statement is false because, there is no depreciation charged on investment, Depreciation is always charged on fixed assets. Investments do not have any depreciation associated with it.
All other statements are true because -
a.Depreciation is a method of spreading the cost of an item over its useful life -  Yes depreciation spreads the cost of item over it's useful life. With each and every year passing this value is reduced and depreciated.
b.Depreciation is a non-cash expense - Yes. Depreciation is a non cash expense, as it does not involve any cash payout.
d.A company that wants to increase its reported income would depreciate a purchase over a longer time than a company that wants to lower its income and reduce tax burden - Yes it is true, because a company which wants to increase reported income would charge less depreciation, ultimately it will give high profits. on the other hand, a company which wants to save tax, will prefer high depreciation and ultimately lower profit.
e.Most capital expenditures are depreciated - Yes it is true, because capital expenditures are generally assocaiated with purchase of assets. But it can have exceptions like purchase of Land, as there is no depreciation charged on Land.

3. The answer to the question is (d) All of the above.
The reason is because all the 3 options would increase cash inflow to the company. Loan will provide cash, Investor will also provide cash and better working capital management will also enhance cash.

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