Question #46
Reading: Reading 12 Evaluating Quality of Financial Reports
PDF File: Reading 12 Evaluating Quality of Financial Reports.pdf
Page: 42
Status: Correct
Correct Answer: B
Question
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?
Answer Choices:
A. 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
B. Yes
C. No, because it is actually the cash basis of accounting that provides more timely and relevant information to users about future cash flows
Explanation
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.