The Expense Recognition Principle Requires the Recognition of Expenses

question 12

Multiple Choice

The expense recognition principle requires the recognition of expenses:

• A)in the same period in which the related revenues are earned.
• B)in the period they are paid.
• C)in the period assets are created.
• D)in the period in which future benefit for the company occurs.

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Definitions:

Direct Method

A method of computing the net cash provided by operating activities in which the income statement is reconstructed on a cash basis from top to bottom.

Indirect Method

A reporting approach used in cash flow statements where net income is adjusted for non-cash transactions and changes in working capital to arrive at cash flow from operating activities.

Financing Activities

Transactions related to raising capital and repaying investors, affecting the company's equity and long-term debt.

Free Cash Flow

The amount of cash generated by a business after accounting for capital expenditures, essential for maintaining or expanding assets.