Financial Reporting and Analysis【 Reading 26】Sample
Consider the following statements:
Statement 1: |
Compared to the cash basis of accounting, the accrual basis of accounting provides more timely information about future cash flows. |
Statement 2: |
Compared to the cash basis of accounting, the accrual basis requires more use of discretion than the cash basis. |
Are these statements CORRECT? | B)
| No, because it is actually the cash basis of accounting that provides more timely and relevant information to users about future cash flows. |
| C)
| No, because it is actually the cash basis of accounting that results in more difficulty in properly assigning revenues and expenses to the appropriate periods. |
|
Users of financial information seek timely information about future cash flows. The accrual basis of accounting provides this information at the earliest appearance of objective evidence. Thus, accrual accounting provides more timely and relevant information to users. The cash basis is more concerned with recording cash flows for transactions that have already occurred.Accrual accounting (not cash-based accounting) necessitates the use of discretion because of the many estimates and judgments involved with assigning revenue and expense to the appropriate periods. |