Which of the following statements about the cash basis of accounting is correct?
A) It can lead to a distorted view of the company's financial performance.
B) It is the only acceptable method for external reporting.
C) It reports revenues when earned and expenses when incurred.
D) It is used when cash is paid at the same time as the cost is incurred, but is not used when cash is paid before the expense is incurred.

Question

Quizplus · Accepted Answer

While the cash basis of accounting is easy to understand and implement, it only reports revenue when cash is received and expenses when cash is paid, which can lead to a distorted view of the company's financial performance. This method is not in accordance with Generally Accepted Accounting Principles (GAAP) and is not permissible for external reporting purposes. It is primarily used by small businesses and individuals who do not have complex accounting transactions.

Which of the Following Statements About the Cash Basis of Accounting