Principles of Finance · free preview
Cash-Basis versus Accrual-Basis Accounting
Cash-basis accounting records transactions only when cash moves, while accrual-basis accounting records them when they occur and matches revenues with the expenses that generated them, and GAAP requires the accrual basis for public companies because it gives a truer picture of performance.
1. Two lenses on the same business
Two lenses on the same business
2. The matching principle
The matching principle
3. Who uses which method
Who uses which method
4. Why the accrual view dominates finance
Why the accrual view dominates finance
5. Defining the cash basis
Which description correctly characterizes cash-basis accounting?
6. The matching principle
A retailer buys inventory in October and sells it in December. Under the matching principle, when is the inventory cost recognized as an expense?
7. Why GAAP requires accrual
Why do GAAP and IFRS require accrual-basis reporting from public companies?
8. Same month, two pictures
A landscaping business completes 3,000 dollars of work on credit in August, and customers pay half in September. Under cash-basis accounting, what does August show?
9. When cash basis suffices
In which situation is cash-basis accounting most defensible for internal use?
10. Profits up, cash down
A company's accrual profits rise steadily while its bank balance falls. What is the most likely reconciliation?
11. The principle that pairs cost with revenue
What two-word principle requires expenses to be recognized in the same period as the revenues they helped generate? Answer in lowercase.
12. The two standards bodies' principles
What four-letter abbreviation names the US accounting standards that require accrual-basis reporting? Write the abbreviation.
13. The asset waiting to become expense
Inventory that has been purchased but not yet sold is carried on the balance sheet under what generic name for costs waiting to be matched? Answer with one word.
14. The tax authority's demand
What three-letter abbreviation names the US agency that requires many businesses to report accrual-basis information on tax returns? Write the abbreviation.
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