Judgetment Case 2-1
Explain the difference between a cash basis and accrual basis measure of performance. Why, in most cases, does accrual basis net income provide a better measure of performance than net operating cash flow? Explain the purpose of adjusting entries as they relate to the difference between cash and accrual accounting. Requirement 1 From the Liberty University on-line library I was able to obtain an article called “Cash vs. Accrual Accounting” (Cantu, October 2012). This articles gives examples of cash method and accrual basis method. I was also able to find a newspaper article on “Accrual vs. Cash Method of Accounting” (Anonymous, 2011). This newspaper article defines accrual method of accounting and the cash method of accounting. I found more information from out text book Intermediate Accounting seventh edition (Nelson, M., Sepe, J., & Spiceland, D).
Requirement 2 There are several difference between cash basis and an accrual basis measure of performance. As stated by our text, cash basis and accrual method of accounting are used to produce a periodic measure of performance that could be used by investors and creditors for predicting future cash flows. The text book states cash basis accounting over short periods of time, the operating cash flows may not be indicative of the company’s long-run cash-generating ability. “With cash basis accounting, transactions are recorded when the cash is received or paid out” (Anonymous 2011). Once cash is received from a sale that is when income is recognized. It is the same for expenses, once cash is paid for a purchase, the expenses are recognized or recorded. The example from our text states in one period a company receives cash that relates to period sales, or makes advance payments for cost related to future periods. “In accrual basis accounting, revenue and expenses are recognized when they occur, not necessarily when cash changes hands” (Anonymous 2011). This takes the focus from cash flows to
Requirement 2 There are several difference between cash basis and an accrual basis measure of performance. As stated by our text, cash basis and accrual method of accounting are used to produce a periodic measure of performance that could be used by investors and creditors for predicting future cash flows. The text book states cash basis accounting over short periods of time, the operating cash flows may not be indicative of the company’s long-run cash-generating ability. “With cash basis accounting, transactions are recorded when the cash is received or paid out” (Anonymous 2011). Once cash is received from a sale that is when income is recognized. It is the same for expenses, once cash is paid for a purchase, the expenses are recognized or recorded. The example from our text states in one period a company receives cash that relates to period sales, or makes advance payments for cost related to future periods. “In accrual basis accounting, revenue and expenses are recognized when they occur, not necessarily when cash changes hands” (Anonymous 2011). This takes the focus from cash flows to
References: Anonymous (January 2011). Accrual vs. Cash Method of Accounting. Capital A.8 Annapolis, MN: Annapolis Capital. Cantu, Lorie Woodward (October 2012). Cash vs. Accrual Accounting. The Cattleman 29-30, 32. Fort Worth, TX: Texas and Southwestern Cattle Raisers Association Incorporated. Spiceland, J., Sepe, J., & Nelson, M. (2013). Intermediate accounting (7th Ed.). Boston: McGraw-Hill.