Why Is the Cash Basis of Accounting Not Used When

question 21

Essay

Why is the cash basis of accounting not used when preparing general purpose financial statements? What is used instead?

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Definitions:

Annual Net Cash Flows

The amount of cash that a company generates or uses in a given year after all income and expenses are accounted for.

Average Rate of Return

A financial ratio that represents the average net profit or return expected on an investment over its lifetime, expressed as a percentage.

Straight-Line Depreciation

A method of calculating the depreciation of an asset, dividing its cost minus salvage value by its useful life, resulting in equal annual depreciation expenses.

Net Present Value

A method used in capital budgeting to evaluate the profitability of an investment or project, calculating the difference between the present value of cash inflows and outflows.