Question

Which of the following are true?

a. Revenues measure the inflow of net assets from operating activities?

b. Expenses measure the outflow of net assets consumed in the process of generating revenues.

c. Recognizing reveneus and expenses always involves a simultaneous entry in an asset and/or liability account.

d. Adjusting entries almost always involve an entry in at least one income statement and one balance sheet account.

e. All of the above are true.

Answer 1

Solution :

Revenue measure inflow of net assets from operating activities as while recoganizing revenue cash/accounts receivable is debited and revenue is credited. hence statement is true.

Expenses measure the outflow of net assets consumed in process of generating revenues as while recognizing expense, expense is debited and cash/liability is credited, resulting in outflow of net asset. Hence statement is true.

from above it is clear that recognizing revenues and expenses always involves a simultaneous entry in asset and /or liability account. Therefore this statement is also true.

Adjusting entries is being done at year end to recoganize expense/revenue. for e.g. insurance expense is recoganized by debited insurance account and crediting prepaid insurance. Insurance expense is part of income statement while perpaid insurance is balance sheet item. Thus adjusting entries always involve an entry in at least on income statement and one balance sheet account. Therefore this statement is also true.

Hence all the above are true. Option E is the right choice.