When Cash Basis Is Different from Accrual Basis
Alice Guth operates a low-impact aerobics studio. Alice has been in business for 3 years and has always had her financial statements prepared on a cash basis. This year, Alice’s accountant has suggested that accrual-based financial statements would give a more accurate picture of the performance of the business. Alice’s friend Frank Geller tells her that, in his experience, accrual-based financial statements tell pretty much the same story as cash-basis statements. Under what circumstances would the cash basis and the accrual basis of accounting yield quite different pictures of a firm’s operating performance? Under what circumstances would the cash basis and the accrual basis show approximately the same picture?