Accounting profits and cash flows are:
A) generally the same since they reflect current laws and accounting standards.
B) generally the same since accounting profits reflect when the cash flows are received.
C) generally not the same since GAAP allows for revenue recognition separate from the receipt of cash flows.
D) generally not the same because cash inflows occur before revenue recognition.
E) Both generally not the same since GAAP allows for revenue recognition separate from the receipt of cash flows; and generally not the same because cash inflows occur before revenue recognition.

Question

Quizplus · Accepted Answer

Accounting profits and cash flows are generally not the same because GAAP allows for revenue recognition separate from the receipt of cash flows. Accounting profits are based on accrual accounting, which recognizes revenue when earned (even if payment has not yet been received) and expenses when incurred (even if payment has not yet been made). However, cash flows only reflect actual cash transactions, so they will only show revenue and expenses when cash is received or paid out. This means that accounting profits and cash flows can differ due to factors such as timing differences between revenue recognition and receipt of cash, accruals and deferrals, and non-cash items like depreciation.

Accounting Profits and Cash Flows Are