Question

How does revenue expenditure affect financial statements? (4 ways)

Answer 1

Revenue expenditure affects financial statements by decreasing net income, reducing cash flow, impacting the balance sheet, and affecting shareholder equity.

Step-by-step explanation:

Revenue expenditure affects financial statements in several ways:

1. Decreases Net Income: Revenue expenditure is recorded as an expense on the income statement, which reduces the net income of a business. This can lead to a lower profitability and a decrease in retained earnings.
2. Reduces Cash Flow: When a business incurs revenue expenditure, it usually involves making cash payments. This reduces the cash flow of the business and can impact its ability to fund other activities or investments.
3. Impacts Balance Sheet: Revenue expenditure affects the balance sheet by reducing the value of assets or increasing liabilities. For example, if a company spends money on repairs and maintenance of its equipment, it will decrease the value of its fixed assets.
4. Affects Shareholder Equity: Revenue expenditure can impact the shareholder equity of a company. When the net income decreases, it can also result in a decrease in the shareholder's equity.