Final answer:
The statement of activities for financial reporting is based on the accrual basis of accounting, where revenues and expenses are recognized when they are earned and incurred.
Step-by-step explanation:
The basis of accounting used in reporting the statement of activities is the accrual basis. Under the accrual basis, revenues are recognized when earned and expenses are recognized when incurred, regardless of when the cash transactions occur. This method provides a more accurate picture of an organization's financial position and better reflects its ongoing activities and financial performance. The statement of activities is akin to an income statement and is typically used by non-profit organizations.
In contrast, the cash basis of accounting recognizes transactions only when cash is exchanged and does not account for receivables or payables. The modified accrual basis is a blend of the two, recognizing revenues when they become available and measurable, and expenses when they are incurred, but not necessarily when paid. However, for full financial statements and in accordance with generally accepted accounting principles (GAAP), the statement of activities should be reported on the accrual basis.
3) accrual basis, as it is the standard for reporting in financial statements such as the statement of activities.