Accrual accounting produces an earnings number that smoothes out the unevenness in year-to-year cash flows,and provides an estimate of sustainable annualized long-run future free cash flows.

Question

Quizplus · Accepted Answer

Accrual accounting allows for the recognition of revenue and expenses when they are earned or incurred, regardless of when cash is received or paid. This can help smooth out fluctuations in cash flows from year to year and provide a more accurate picture of a company's performance over time. Moreover, by looking at a company's accrual-based earnings, investors can estimate its long-term, sustainable cash flows that can be used to produce free cash flow.

Accrual Accounting Produces an Earnings Number That Smoothes Out the Unevenness