Accrual vs cash basis accounting exam review
This flashcard set reviews key concepts and differences between accrual and cash basis accounting, providing essential questions and answers for exam preparation.
Quiz(24 questions)
1. What does accrual accounting recognize regarding revenue?
Terms in this Study Set(24)
Flashcards 1(12)
Accrual accounting definition?
Records revenues and expenses when they are earned or incurred, regardless of cash flow.
Cash basis accounting definition?
Records revenues and expenses only when cash is received or paid.
True or False: Accrual accounting provides a more accurate picture of financial health.
True - It matches revenues with the expenses incurred to generate them.
Accrual vs Cash: Revenue recognition timing?
Accrual: when earned; Cash: when cash is received.
Accrual accounting example?
A company completes a service in December, invoices in January, and receives payment in February.
Cash basis accounting example?
A business sells goods and receives payment immediately, recording revenue at that moment.
Fill in the blank: Under accrual accounting, expenses are recorded when they are __________.
incurred.
Cause of cash basis adoption?
- Simplicity - Smaller businesses often prefer it - Easier cash flow management
True or False: Cash basis accounting is allowed under GAAP.
False - GAAP requires the accrual basis for financial reporting.
Impact of accrual accounting on taxes?
May defer tax liabilities since income is recognized before cash is received.
Why do companies prefer accrual accounting?
Provides better matching of income and expenses, leading to more accurate financial statements.
What is a major limitation of cash basis accounting?
Does not provide a complete picture of financial performance, especially for credit transactions.
Flashcards 2(12)
Accrual accounting recognizes revenue when...
...earned, regardless of cash flow. This means recording revenue when services are performed.
True or False: Cash basis accounting can be used by all businesses.
False - Only small businesses without inventory can typically use cash basis accounting.
Fill in the blank: Expenses are recorded in accrual accounting when they are _____.
incurred, not when paid. This aligns expenses with related revenues.
Contrast accrual and cash basis accounting.
- Accrual: Revenue recognized when earned - Cash: Revenue recognized when received
Which basis gives a more accurate financial picture? Why?
Accrual basis, as it reflects the true financial position by matching revenues and expenses.
Worked example: A service is provided in December but paid in January. Which method shows revenue in December?
Accrual basis accounting shows revenue in December, even if cash is received in January.
True or False: Cash basis accounting is simpler than accrual accounting.
True - It involves fewer accounting entries and is easier for small businesses.
What is an example of an accrued expense?
Salaries payable at month-end. They are recognized in the month incurred, not paid.
Accrual accounting requires adjustments. Name one.
Adjusting entries for accrued revenues and expenses ensure accurate financial reporting.
True or False: Cash basis accounting can hide a business's financial health.
True - It can misrepresent profits and cash flow, leading to poor decision-making.
When does cash basis accounting recognize expenses?
When cash is actually paid out. This can lead to mismatched profit reporting.
List one advantage of accrual accounting.
Better matching of revenues and expenses provides a clearer picture of profitability.
Questions in this Study Set(24)
1. What does accrual accounting recognize regarding revenue?
2. When is revenue recognized in accrual accounting?
3. Which of the following is true about cash basis accounting?
4. Which of the following statements is true regarding cash basis accounting?
5. True or False: Accrual accounting can show profits that are not yet received in cash.
6. Fill in the blank: Under accrual accounting, expenses are recorded when they are _____.
7. Which scenario best illustrates cash basis accounting?
8. In which scenario would accrual accounting show a different revenue amount than cash basis accounting?
9. Under which accounting method are expenses recorded when incurred?
10. Which financial statement format generally provides a clearer picture of a company's performance?
11. Which of the following is NOT a reason some businesses might prefer cash basis accounting?
12. True or False: Cash basis accounting can potentially lead to misleading financial results.
13. How does accrual accounting affect tax liabilities?
14. How does cash basis accounting recognize expenses?
15. Which accounting method is required under GAAP?
16. Which of the following is an example of an accrued liability?
17. Which statement about cash basis accounting is true?
18. Which of the following is NOT a characteristic of accrual accounting?
19. What is a limitation of cash basis accounting?
20. What is one disadvantage of cash basis accounting?
21. When does accrual accounting recognize expenses?
22. Which method allows for better forecasting of future profitability?
23. Which of the following scenarios illustrates accrual accounting?
24. Which of the following is a common adjustment made in accrual accounting?
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