Question

Many airlines have frequent flyer programs that permit travelers to accumulate credits that can be applied to the cost of tickets for future flights. Most airlines recognize the cost of their frequent flyer programs when the credits are used to purchase tickets. This practice, which seems to ignore the matching concept, results in: Answer stating liabilities and expenses at appropriate amounts. overstating liabilities and expenses. understating liabilities and expenses. understating liabilities and overstating expenses.

Answer 1

Answer:

The correct answer is letter "B": overstating liabilities and expenses.

Explanation:

In accounting, the matching principle states that revenues must be recognized with their corresponding expenses during the same period where both of them took place. In the case of the airlines providing frequent flyer programs, they will partly have to take charge of the basic costs of a plane ticket to continue providing such benefits to their customers. However, it is usually requested a large number of credits to swap the free flight ticket, implying the possibility that it could take more than one accounting period for that to happen.

Then, by not recognizing the revenues and their associated costs in the same period where they took place, airlines overstate liabilities and expenses in their financial statements.