Communication Activity
Response to the following problem:
Some people believe that cash basis accounting is better than accrual basis accounting in predicting a company's future success. This idea became more popular after many reports of corporate financial scandals where management manipulated the timing of recognizing expenses and revenues in accrual accounting to influence profit. Others argue it is easier to manipulate profit using cash basis accounting.
Instructions
Write a memo discussing the following issues:
(a)What is the difference in calculating profit using accrual basis accounting versus cash basis accounting?
(b)Identify one way that management might be able to increase profit by manipulating the timing of revenue or expense recognition under accrual accounting.
(c)Identify one way that management might be able to increase profit using cash basis accounting.
(d)Which basis do you believe is more reliable for measuring performance and why?