If Managers Were Given Freedom to Choose Which Expenses to Classify

question 1

Multiple Choice

If managers were given freedom to choose which expenses to classify as investments,which of the following is most accurate?

• A)Managers will have an incentive to classify all expenses as investments.
• B)Managers will have an incentive to classify no expenses as investments.
• C)Managers will not have an incentive either way with respect to classifying expenses as investments.
• D)Managers would most likely follow the rules established by GAAP,because they were formulated to be optimal for managers to follow.

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Definitions:

Dividends

Payments made by a corporation to its shareholders, typically from profits.

Shareholder Equity

The residual interest in the assets of a company after deducting liabilities, representing the net worth attributable to shareholders.

Common Stocks

Shares representing ownership in a corporation, giving holders voting rights and a share in the company's profits through dividends and/or capital appreciation.

Retained Earnings

Represents the portion of a company's profits not distributed as dividends to shareholders but instead reinvested in the business.