Question

Under what circumstances would a company to transition from cash to accrual basis accounting? Select all that apply.

a. To use the income statement as a proxy for cash flow
b. To comply with ASC 606
c. To provides a more accurate snapshot of a firm’s financial health
d. To simplify a firm’s accounting

Answer 1

Companies transition from cash to accrual basis accounting under various circumstances, including using the income statement as a proxy for cash flow, complying with ASC 606, and providing a more accurate snapshot of financial health.

Step-by-step explanation:

There are several circumstances under which a company may transition from cash to accrual basis accounting. These include:

To use the income statement as a proxy for cash flow: Accrual accounting provides a better representation of a company's cash flow by including revenues and expenses when they are earned or incurred, rather than when cash is received or paid.

To comply with ASC 606: ASC 606 is the accounting standard that governs revenue recognition. Companies may need to transition to accrual accounting to comply with this standard.

To provide a more accurate snapshot of a firm's financial health: Accrual accounting provides a more comprehensive and accurate view of a company's financial performance and position by capturing all revenues and expenses regardless of when cash is exchanged.

Transitioning to accrual accounting can improve financial reporting and decision-making, but it may also require more complex record-keeping and analysis.