Intermediate Financial Reporting 1 Practice Exam

Which of the following statements describes expenses?

Costs of providing goods and services Increases in equity from non-operating activities Outflows of cash only Taxes paid

Correct Answer:

Costs of providing goods and services

Explanation:

Expenses are the costs a business incurs to earn its revenue, reflecting the resources consumed in providing goods or services. This includes materials, labor, overhead, and even non-cash items like depreciation that are recognized as costs in the income statement. Because expenses represent the use of resources to generate income, they reduce net income and equity. That’s why the description of expenses as the costs of providing goods and services is the best fit. It isn’t an increase in equity, which would imply a gain or inflow rather than a cost. It also isn’t limited to cash outflows, since some expenses (like depreciation) do not involve an immediate cash payment. And while taxes paid are a type of expense, they’re just one category among many expenses.

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