Which statement correctly explains the relationship between cash flows, accruals and reported earnings?

Question

Quizplus · Accepted Answer

The accrual basis of accounting provides the best representation of a company's financial position and performance because it matches revenues and expenses more accurately with the period in which they occurred. Cash flows alone do not provide a complete picture of a company's financial position and performance, as they do not account for non-cash transactions such as depreciation or accruals. While accruals can reduce earnings quality if used improperly, they are necessary in financial reporting to provide a more accurate picture of a company's financial position and performance in accordance with GAAP. The cash basis of accounting, on the other hand, does not use accruals and can therefore be misleading in terms of a company's financial position and performance.

Which Statement Correctly Explains the Relationship Between Cash Flows, Accruals