Ethical Obligations and Decision-Making in Accounting 2nd Edition by Steven Mintz, Roselyn Morris

Exercise 9

Explain why accrual earnings and cash flow from operating activities are different amounts. Which of the two numbers do you think is more reliable? Give an example of where the accrual amount creates questions about reliability while the cash flow amount would be a better gauge of earnings.

Step 1 of 2

Accrual accounting:

Accrual accounting is a type of accounting in which transactions are recorded when they recognized by the company.

It true accrual accounting mainly matters of timing. It includes

Accrual basis revenue:

Accrual basis income is a method of recording accounting transactions in which income is recorded when they are recognized not when cash is received.

Income is recorded when the sale is done, doesn’t matter cash is received or not (credit sales).

Accrual basis expense:

In accrual basis accounting, the expenses are recorded when recognized not when cash is paid.

Cash basis accounting:

It is a type of accounting in which the transactions are recorded when cash is paid or received by the company.

Cash flow statements:

The cash flow statement provides information about the outflow or inflow of cash over the given accounting period.