Question

Accrual accounting is used because:

A. it provides past ability to generate negative cash flows.
B. it provides a better indication of a company's ability to generate cash flows than the cash basis.
C. cash flows are considered less important.
D. it recognizes revenues when cash is received and expenses when cash is paid.

Answer 1

Accrual accounting is preferred because it recognizes revenues and expenses when they are earned and incurred, which provides a more accurate picture of a company's financial position, unlike cash basis accounting which recognizes transactions upon cash exchanges.

Step-by-step explanation:

The correct answer to the question about why accrual accounting is used is B. it provides a better indication of a company's ability to generate cash flows than the cash basis. Accrual accounting is preferred over cash basis accounting because it more accurately reflects a company's financial position by recognizing revenues when they are earned and expenses when they are incurred, regardless of when the cash is actually exchanged. This method offers a more realistic picture of a company's operations and financial health over time. Contrary to option D, accrual accounting does not recognize revenues and expenses simply based on cash transactions, which is actually a characteristic of cash basis accounting.