Accrual Accounting: Common Misconceptions

Common Misconceptions of Accrual Accounting

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Question

Under accrual accounting, which of the following is/are Incorrect?

I. Revenues are recognized when cash is received.

II. The reported income is a good indicator of the firm's current performance.

III. Expenses do not always involve cash flows.

IV. Revenues and the related costs are matched in the same period.

Answers

Explanations

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A. B. C. D.

A

Under accrual accounting, revenues are recognized when the earnings process behind the revenues is complete and expenses are recognized in the period the goods and services are used for generating income. Therefore, revenues and expenses do not always involve actual cash flows, though revenues and costs that are related do get matched in the same period whenever such an identification is possible.

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