True Statements for CFA® Level 1 Exam

E

Accrual is the process of recognizing assets, liabilities, and components of comprehensive income.

Let's analyze each statement and determine which one is true:

A. Recognition is concerned with recognizing a liability from a current cash. Recognition refers to the process of formally recording or incorporating an item in the financial statements of an entity. It is not specifically concerned with recognizing a liability from current cash. This statement is not true.

B. Deferral is the process of formally recording or incorporating an item in the financial statements of an entity. Deferral is the opposite of recognition. It refers to the postponement of the recognition of revenue or expenses to future accounting periods. This statement is true. Deferral involves delaying the recognition of certain items to a later period when the associated revenue or expense is actually earned or incurred.

C. Realization would reduce a liability that is recorded as a result of a cash receipt by recognizing revenues. Realization refers to the process of converting non-cash resources or rights into money, typically through the sale of goods or services. It is not directly related to reducing a liability that is recorded as a result of a cash receipt. This statement is not true.

D. Allocation is the process of converting non-cash resources and rights into money. Allocation does not refer to the process of converting non-cash resources and rights into money. It generally involves the distribution or assignment of costs or resources to various segments, departments, or activities within an entity. This statement is not true.

E. Accrual is the process of recognizing assets, liabilities, and components of comprehensive income. Accrual refers to the process of recognizing revenue, expenses, assets, liabilities, and other components of comprehensive income in the financial statements, regardless of the timing of cash flows. This statement is true. Accrual accounting is based on the concept that economic events should be recorded when they occur, not necessarily when the associated cash flows take place.

In summary, the true statement is:

B. Deferral is the process of formally recording or incorporating an item in the financial statements of an entity.