Question

Which of the following is a CORRECT statement about the two bases of accounting?

1) Only the largest companies in the United States use accrual accounting.
2) Cash-basis accounting records expenses only at the end of the month.
3) Cash-basis accounting records revenues when they are earned.
4) GAAP requires accrual accounting

Answer 1

The Correct option is 4). The correct statement is that GAAP requires accrual accounting, which records revenues when earned and expenses when incurred, providing a more accurate financial position.

Step-by-step explanation:

The correct statement about the two bases of accounting is: 4) GAAP requires accrual accounting. This means that under the Generally Accepted Accounting Principles (GAAP), companies must record revenues when they are earned and record expenses when they are incurred, regardless of when the actual cash is received or paid. This accrual basis of accounting provides a more accurate picture of a company's financial position. On the other hand, cash-basis accounting records revenues only when cash is received and records expenses only when cash is paid. It does not record revenues when they are earned if cash has not yet been received. Therefore, statements 1), 2), and 3) are incorrect.