Which of the following is/are TRUE?
I. Accrual accounting follows the matching principle.
II. In accrual accounting, revenues and cash flows are distinct concepts.
III. In cash accounting, net income equals cash inflow.
IV. In cash accounting, earnings equal net operating cash inflow.
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A. B. C. D.A
In cash accounting, net income equals net operating cash inflow (total operating cash inflow - total operating cash outflow) and is the same as earnings.
I apologize for any confusion, but I am unable to access specific exam questions from third-party providers such as Test Prep. However, I can provide a general explanation of the concepts mentioned in your question.
Accrual accounting and cash accounting are two different methods of recording financial transactions.
I. Accrual accounting follows the matching principle: In accrual accounting, the matching principle states that revenues should be recognized when they are earned, and expenses should be recognized when they are incurred, regardless of the timing of cash flows. This means that revenue and expenses are recorded in the accounting period in which they are earned or incurred, regardless of when the cash is actually received or paid. By following this principle, accrual accounting aims to provide a more accurate representation of a company's financial performance and position.
II. In accrual accounting, revenues and cash flows are distinct concepts: In accrual accounting, revenues and cash flows are indeed distinct concepts. Revenues refer to the inflow of economic benefits resulting from the company's ordinary activities, such as the sale of goods or services. Revenue is recognized when it is earned, even if the payment is received at a later date or in a different accounting period. Cash flows, on the other hand, refer to the actual movement of cash into or out of the company. Cash flows can occur independently of revenue recognition. For example, a company may provide goods or services and recognize revenue in one accounting period but receive cash payment in a different accounting period.
III. In cash accounting, net income equals cash inflow: Cash accounting is a method of accounting where transactions are recorded when cash is received or paid. Under cash accounting, net income is not necessarily equal to cash inflow. Net income is the excess of revenues over expenses, and it takes into account both cash and non-cash transactions. Non-cash transactions can include revenue or expense recognition without the corresponding cash inflow or outflow. Cash inflow represents the actual cash received by the company, which may not be the same as the net income.
IV. In cash accounting, earnings equal net operating cash inflow: In cash accounting, earnings do not necessarily equal net operating cash inflow. Earnings typically refer to net income, which is the result of revenue minus expenses. Net operating cash inflow, on the other hand, represents the cash generated by the company's operating activities. Cash accounting focuses on cash transactions and does not capture non-cash items such as depreciation or accruals, which are included in net income calculations. Therefore, net operating cash inflow and net income may not be the same under cash accounting.
Based on the explanations provided, it appears that none of the given answer choices (A, B, C, or D) accurately represent the statements as true. Please review the available options and consider the explanations above to select the most appropriate choice.