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Which of the following statements about cash basis and accrual basis accounting is true?

A. Accrual basis accounting is less accurate.
B. Cash basis accounting records transactions at the time they occur.
C. Cash basis accounting uses the cash account.
D. GAAP approves of cash basis accounting.

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GinnyAnswer

Final answer:

Accrual basis accounting is more comprehensive and accurate than cash basis accounting, aligning expenses and revenues with their occurrence. Cash basis accounting records transactions based on cash flow, while GAAP supports accrual basis accounting for a more precise financial representation.


Explanation:

Accrual basis accounting is more accurate compared to cash basis accounting as it records transactions when they occur, not necessarily when cash exchanges hands. In contrast, cash basis accounting records transactions at the time cash is received or spent.

Accrual accounting aligns expenses and revenues with their occurrence, providing a more comprehensive financial picture for larger organizations. The Generally Accepted Accounting Principles (GAAP) favor accrual basis accounting due to its ability to offer a more accurate representation of financial position and performance.


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