Brain Teaser

Required:

Use FASB to identify what standard-setters have said as to the superiority of accrual accounting relative to a cash basis. Do you agree with the justification offered for accrual accounting? Explain.

* The FASB indicates that the accrual accounting method is superior to cash basis because it does not represent cost incurred. Initially, I would think that the cash basis would be superior because it is easier to account for. Also, it is not recorded until cash is actually exchanged. The accrual method accounts for transactions prior to the actual cash being received. However, thinking of it on the basis that it represents cost incurred, I guess I would consider it superior. It is best for budgeting purposes because you know how much you are owed, how much you are spending and you get a better record of cash flow in a particular accounting period.

BONUS QUESTION:

Identify which accounting pronouncement specifically observes: “This Statement relies on a basic premise of generally accepted accounting principles that accrual accounting provides more relevant and useful information than does cash basis accounting.”

* This refers to the FASB Statement of Financial Accounting Standards No. 106. The section refers to employers’ handling postretirement benefits other than pensions.

Accounting Theory Issue:

When is a “cash-basis method” used within the accounting literature? Do you view such a method as complementary or preferable to accrual accounting in the settings you have identified?

* According to the accounting literature, the “cash-basis method” is mentioned in the section regarding receivables; this is noted as receivables section 310. More specifically, the “cash-basis method” is mentioned directly in receivables section 310-10-50 (c) 3 and receivables section 310-10-35. I would view this method as being more complementary rather than preferable as it relates to these specific sections.

Auditing Issue:

Would a cash...