Question

Under the accrual basis of accounting, which of the following statements is true? I. Reported net income provides a measure of operating performance II. Revenue is recognized when cash is received, and expenses are recognized when payment is made III. Cash inflows are recognized when they are received, and cash outflows are recognized when they are made I only III only I amd III I, II, and III

Answer 1

Option (a) is correct.

Under accrual basis of accounting, reported net income provides a measure of operating performance.

under accrual basis of accounting, revenues are recognized when they are earned rather than when the actual cash is received. In the same way, expenses are recognized when they are incurred rather than when the actual payment for them is made. In this way, net income is calculated. And that net income provides a measure of the true operating performance, because all the revenues and expenses earned and incurred for the year, have been provided for in the income statement, irrespective of the fact whether any cash is provided for them or not.