Brain Teaser Case Study Bitsy Brooks 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. 06 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 vouch. Moreover, there will be no adjusting entries to make and double check. Auditors usually have to charge more to do the accrual basis because it is so much more involved and takes much more time and validation.
Does FARS suggest the existence of guidance that sponsors the idea that certain earnings may be accounted for on an accrual basis while the related income taxes are accounted for on a cash basis? Yes, the Financial Accounting Research System suggests the existence of guidance that sponsors the idea that certain earnings may be accounted for on an accrual basis while the related income taxes are accounted for on a cash basis. For example, the different business transactions that result to temporary differences between book and tax income.
Another example would be rental income received in advance is accounted for under cash basis for tax purposes while its related income is accounted for under accrual basis for accounting income purposes. When did most not-for-profit organizations change from a cash or “modified cash” basis to accrual accounting? Most not-for-profit organizations change from a cash or modified cash basis to accrual accounting occurred in the 1960’s according to FASB’ Statement of Financial Accounting Standards No. 93: Recognition of Depreciation by Not-for-Profit Organizations.