Brain Teaser Case Study
University of Phoenix
Advanced Topics in Accounting Research
July 5, 2010
Use FARS 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. Accrual accounting is a much better system than cash basis accounting. The accrual accounting promotes matching concepts and cautiousness which are two basic accounting concepts. In cash basis, financial statements represent actual facts of an organization and what the entity owns. The accrual accounting presents a more accurate picture of the financial position of the reporting entity.
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 statement was included in the Financial Accounting Standards Board pronouncement Statement of Financial Accounting Standard No. 106 and discusses ‘Employers’ Accounting for 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?
The cash basis method is used by small business including non-profit organizations. I believe that allowing the use of cash basis accounting for these businesses is more complementary than preferable to accrual accounting. Businesses with relatively simple business and transaction processes do not need a relatively more complex accounting system.
Auditing Issue: Would a cash basis be easier or harder to audit than an accrual basis? Why?
Cash basis would be much easier to audit than an accrual basis. This is so because The paper trail would be much easier to verify and...
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