The matching principle suggests that 1. equipment should be financed with long-t
ID: 2655304 • Letter: T
Question
The matching principle suggests that1. equipment should be financed with long-term sources
2. current assets may be financed with short-term
sources
3. plant should not be financed with short-term
sources A. 1, 2, and 3 B. 1 and 3 C. 2 and 3 D. 1 and 2 The matching principle suggests that
1. equipment should be financed with long-term sources
2. current assets may be financed with short-term
sources
3. plant should not be financed with short-term
sources A. 1, 2, and 3 B. 1 and 3 C. 2 and 3 D. 1 and 2
Explanation / Answer
A is right option.
The matching principle requires that revenues and any related expenses be recognized together in the same period. Thus, if there is a cause-and-effect relationship between revenue and the expenses, record them at the same time. If there is no such relationship, then charge the cost to expense at once.
Long term sources of finance are those that are needed over a longer period of time - generally over a year. The reasons for needing long term finance are generally different to those relating to short term finance.
Long term finance may be needed to fund expansion projects - maybe a firm is considering setting up new offices in a European capital, maybe they want to buy new premises in another part of the UK, maybe they have a new product that they want to develop and maybe they want to buy another company. The methods of financing these types of projects will generally be quite complex and can involve billions of pounds.
Option 2: current assets may be financed with short-term sources
Here the word 'may' has been used and hence acceptable.
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