Which of the following is/are FALSE?
I. Over the life of the firm, income and cash flow are the same.
II. Cash accounting follows the Matching Principle of matching cash flows to appropriate periods.
III. Accrual accounting matches revenues with the associated costs.
IV. Accrual accounting allocates many cash flows to time periods other than those in which they occur.
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A. B. C. D.A
Unlike Accrual accounting, Cash accounting recognizes revenues and expenses when cash flows occur, not necessarily when the earnings process is complete or goods and services consumed.
Let's go through each statement and determine whether it is true or false:
I. Over the life of the firm, income and cash flow are the same. This statement is FALSE. Income and cash flow are not necessarily the same. Income refers to the revenue generated by a firm after deducting expenses, while cash flow refers to the actual inflow and outflow of cash. Cash flow includes not only income but also other factors such as investments, loans, and changes in working capital.
II. Cash accounting follows the Matching Principle of matching cash flows to appropriate periods. This statement is TRUE. Cash accounting is a method of recording transactions when cash is actually received or paid. It does not consider the timing of revenue recognition or expenses. Therefore, cash accounting aligns with the Matching Principle, which aims to match expenses with the revenues they generate in the same accounting period.
III. Accrual accounting matches revenues with the associated costs. This statement is TRUE. Accrual accounting is a method of recognizing revenues and expenses when they are earned or incurred, regardless of the timing of cash flows. By matching revenues with the associated costs, accrual accounting provides a more accurate representation of a firm's financial performance during a given period.
IV. Accrual accounting allocates many cash flows to time periods other than those in which they occur. This statement is FALSE. Accrual accounting does not allocate cash flows to time periods other than when they occur. Instead, it recognizes revenues and expenses in the period in which they are earned or incurred, even if the corresponding cash flows happen in different periods. Accrual accounting aims to provide a more accurate representation of a firm's financial performance by considering the economic activities rather than just cash movements.
Based on the evaluation of each statement, the FALSE statements are: I. Over the life of the firm, income and cash flow are the same. IV. Accrual accounting allocates many cash flows to time periods other than those in which they occur.
Therefore, the answer is B. I, III & IV.