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Cash Basis or Accrual Basis? In the finance literature, there seems to be an emphasis on cash. Stock prices are discussed as the present value of future cash flows. Most of the capital budgeting applications in which investment decisions are made appear to focus on the cash required at acquisition and the cash flows expected during the life of that investment.
If cash is so important, why is accrual accounting the focus in GAAP? A problem with just following the cash is that you can collect cash or pay cash and really have little economic activity underlying those cash exchanges.
Indeed, I can structure terms of payment almost any way I choose in a contract, including so-called balloon payments, where almost all the cash changes hands at the end of a contract.
If all accounting statements did was track the cash, little information would be provided as to how the cash had actually been generated, invested, or lost. I mean, cash acquired through debt has to be different from cash that one receives because he or she has performed some service or sold some asset.
In fact, receiving cash from selling something is not at all the same as receiving cash as an employee for providing services. After all, you can only sell an asset once, whereas services can continue to be provided, generating recurring cash flows.
I remember someone once asserting that cash flow was all that was important, and accountants just "mess things up" by imposing the accrual accounting framework on the analysis of cash flows.
It made no sense when I heard it, and the more I learn about economic activity, the less sense that assertion makes. Besides, we accountants, after all, do prepare statements of cash flow as well. However, we respect the differences in operating, financing, and investing activities.
Yet, it is obvious that many investors are at least confused as to the nature of accrual accounting and its importance relative to cash flow analysis.
I wonder whether GAAP explain the importance of accrual accounting relative to a cash basis. Use FARS to identify what standard-setters have said as to the superiority of accrual accounting relative to a cash basis. Do you agree with the justification offered for accrual accounting?
Identify which accounting pronouncement specifically observes: When is a "cash-basis method" used within the accounting literature? Do you view such a method as complementary or preferable to accrual accounting in the settings you have identified?
Would a cash basis be easier or harder to audit than an accrual basis?
Does FARS suggest the existence of guidance that sponsors the idea that certain earnings may be accounted for on an accrual basis while the related income taxes are accounted for on a cash basis? When did most not-for-profit organizations change from a cash or "modified cash" basis to accrual accounting?
Below are my answers.Resources: Brain Teaser 4: Cash Basis or Accrual Basis? in Ch.
4 of Mastery of the Financial Accounting Research System (FARS) Through Cases Write a . Social Security: Windfall Even a 50% cash position did not defend you as well as the BCN advantage service.
We must admit, upfront, that the events of September 11 th skewed the numbers more than little. members who have elected to purchase service credit on an installment basis may prospectively discontinue the payments if the member. Brain Teaser 4 ACC Brain Teaser 4 Use FARS to identify what standard-setters have said as to the superiority of accrual accounting relative to cash basis.
The following is a case study from Chapter 4 of the text, Mastery of the Financial Accounting Research System (FARS) through Cases: "Brain Teaser 4: Cash Basis or Accrual Basis?" Alicia: In the finance literature, there seems to be an emphasis on cash.
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