The Accrual Basis of Accounting

question 138

Multiple Choice

The accrual basis of accounting:

• A) Is generally accepted for external reporting because it is more useful than cash basis for most business decisions.
• B) Is flawed because it gives complete information about cash flows.
• C) Recognizes revenues when received in cash.
• D) Recognizes expenses when paid in cash.
• E) Eliminates the need for adjusting entries at the end of each period.

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Definitions:

Rate of Inflation

The measure of how the general level of prices for goods and services is rising, and, subsequently, how purchasing power is falling over time.

Nominal Interest Rate

The interest rate before adjustments for inflation, representing the raw rate of interest paid on savings or charged on loans.

Real Interest Rate

The rate of interest an investor expects to receive after allowing for inflation, representing the true cost of borrowing and the true yield on investing.