Question 28
NECO
•
2018
•
FINANCIAL_ACCOUNTING
•
objective
Define the accrual basis of accounting and explain why it gives a more accurate picture of a company's financial performance than the cash basis. Illustrate your explanation with one example of a transaction that is recorded under the accrual basis but not under the cash basis.
Answer Options
A.
Accrual accounting records revenues when earned but expenses only when cash is paid, leading to mismatched periods. Example: recording a credit purchase of inventory when the invoice is paid later.
Correct Answer
B.
Accrual accounting records revenues when earned and expenses when incurred, matching them to the period they relate to, which provides a more faithful representation of performance than cash accounting that records only cash movements. Example: recording a credit sale of goods at the point of sale (revenue recognised) even though cash will be received later.
C.
Accrual accounting records revenues only when cash is received and expenses only when cash is paid, which aligns cash flows with performance. Example: recognizing a credit sale only when the customer pays the invoice.
D.
Accrual accounting ignores timing of cash flows and records all transactions at the end of the fiscal year. Example: posting a credit sale at year‑end regardless of when the sale occurred.
Correct Answer
B
Correct Option:
Accrual accounting records revenues when earned and expenses when incurred, matching them to the period they relate to, which provides a more faithful representation of performance than cash accounting that records only cash movements. Example: recording a credit sale of goods at the point of sale (revenue recognised) even though cash will be received later.
About This Question
This is
Neco
2018
Financial Accounting
Question 28.
It is one of the
objective
questions from the
2018
Neco
Financial Accounting
examination.
Difficulty level:
Easy
.