Asked by Demia Kelly on May 09, 2024
Verified
Accrual accounting can produce large discrepancies between the firm's reported profit performance and the amount of cash generated from operations.
Reported Profit
The profit figure announced by a company, typically found in its financial statements, after accounting for all expenses.
Accrual Accounting
An accounting method where revenue and expenses are recorded when they are earned or incurred, respectively, regardless of when the cash is actually exchanged.
- Appreciate the impact of accrual accounting on the evaluation of profits and its potential divergences from cash movements.
Verified Answer
LW
Lindsey WhaleyMay 12, 2024
Final Answer :
True
Explanation :
Accrual accounting recognizes revenue and expenses when earned or incurred, regardless of when the cash is received or paid. This can result in reported profits that do not reflect the actual cash flow of the business. For example, a company may recognize revenue for a sale that has not yet been paid for, or it may recognize expenses for a cost that has not yet been paid. This can create a discrepancy between reported profits and the cash generated from operations.
Learning Objectives
- Appreciate the impact of accrual accounting on the evaluation of profits and its potential divergences from cash movements.
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