Final answer:
The process of spreading the cost of a plant asset over its life cycle is called depreciation, which aligns expenses with earnings.
Step-by-step explanation:
- The process by which businesses spread the allocation of a plant asset's cost over its useful life is called depreciation. Companies use depreciation to account for the decreasing value of assets over time due to wear and tear, obsolescence, or age.
- It allows firms to match the expense of the asset to the revenue it helps to generate over the asset's useful life. This accounting method aligns with the principle of matching expenses with revenues in the periods in which they are incurred and earned.
- Firms can raise financial capital to purchase assets through various strategies, such as acquiring funds from early-stage investors, reinvesting profits, securing loans through banks or bonds, and by selling stock.
- The decision to choose a specific source of financial capital will directly affect the company's cash flow and how the expenditure for an asset will be financed.