The approach to preparing financial statements based on recognizing revenues when the cash is received and reporting expenses when the cash is paid is called:
A)Cash basis accounting.
B)The matching principle.
C)The operating cycle of a business.
D)The revenue recognition principle.
E)Accrual basis accounting.

Question

Quizplus · Accepted Answer

The approach of recognizing revenues when the cash is received and reporting expenses when the cash is paid is known as cash basis accounting. This is in contrast to the accrual basis accounting, where revenues and expenses are recognized when they are earned or incurred, regardless of when the cash is received or paid. The matching principle is also a fundamental concept of accounting, which requires that expenses be matched with the revenues they generate. The operating cycle of a business refers to the time it takes for a company to convert cash into inventory, sell the inventory, and receive cash from customers. The revenue recognition principle states that revenue should be recognized when it is earned, regardless of when the cash is received.

The Approach to Preparing Financial Statements Based on Recognizing Revenues