Which of the following statements about cash basis accounting and accrual basis accounting is correct?
A) Net income is generally larger under accrual basis accounting than cash basis accounting.
B) GAAP does not require the use of accrual basis accounting for external reporting.
C) Accrual basis accounting and cash basis accounting will always produce the same amount of net income.
D) Accrual basis accounting provides a better measure of operating performance than cash basis accounting.

Question

Quizplus · Accepted Answer

Accrual basis accounting provides a better measure of operating performance than cash basis accounting because it recognizes revenues and expenses when they are earned or incurred, rather than when cash is received or paid. This gives a more accurate picture of a company's financial performance over a given period of time. Option A is incorrect because net income can be higher or lower under accrual basis accounting depending on the timing of revenue recognition and expense accruals. Option B is incorrect because GAAP requires the use of accrual basis accounting for external reporting for most companies. Option C is incorrect because accrual basis accounting and cash basis accounting may produce different amounts of net income depending on the timing of transactions.

Which of the Following Statements About Cash Basis Accounting and Accrual