Accounting Theory Issue

Accounting Theory Issue: When is a "cash-basis method" used within the accounting literature? Do you view such a method as complementary or preferable to accrual accounting in the settings you have identified?

Solution: Although it is not prohibited, cash accounting is looked down upon by the IRS for tax purposes. Companies have great potential to change their taxes by using cash accounting. They can inflate their expenses and deflate their revenues with cash accounting because money has or has not been sent or received. I think all accounting should be done the same. Accrual method is a better representation of a company's financial position. Using cash accounting to take advantage of the government is no different than taking advantage of the people. Accrual accounting should be the standard for accounting, and cash basis should not be tolerated. Also, companies that generate revenue under a certain amount are allowed to use cash accounting. I would also think, again, that all companies regardless of size should be held to the same standards of accounting principles.

Auditing Issue: Would a cash basis be easier or harder to audit than an accrual basis? Why?

Solution: I think the answer is easier. With cash basis, a company does not have to record its inventory. Therefore, the auditor would not necessarily have to audit inventory. This could take a large chunk out of the auditing process and cause the audit to take substantially less time. Similarly, there is not a paper trail to dig through with cash accounting. Money is recorded when it received or handed out. The existence of receivables and payables is far less.