The statement of cash flows provides information that may be useful in predicting future cash flows, evaluating financial flexibility, assessing liquidity, and identifying a company’s financing needs. It is not, however, the best financial statement for learning about a firm’s financial performance during a period.

Information about a company’s financial performance is provided by the income statement. Two basic principles—the revenue recognition principle and the matching concept—work to distinguish the income statement from the statement of cash flows.

(a) Define the revenue recognition principle and the matching concept.

(b) Briefly explain how these two principles work to make the income statement a better report regarding a firm’s periodic financial performance than the statement of cash flows.