Compare the relative advantages and limitations of financial statements prepared on a cash basis with those prepared on an accrual basis.

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Compare the relative advantages and limitations of financial statements prepared on a cash basis with those prepared on an accrual basis. This essay will analyze the relative advantages and limitations between two types of financial statements, those prepared on cash basis and those prepared on accrual basis. Financial statements are an important aspect for all the firms since it usually is the main way to assess a firm’s financial state and can compare it with statements from previous dates. That way a firm can determine whether the firm’s financial position have improved or worsened as time passes by. It could also help in determining what the firm should fix, improve or completely change in the way it operates in order to achieve…show more content…
If that was the case a financial statement prepared on accrual basis would be more appropriate because as mentioned before it is more accurate and dependable to measure the income of the firm. Additionally many firms prefer to use cash basis in an effort to minimize the taxable income of the firm because if the firm uses cash accounting the revenue taken into account are only those that they have received cash for, whereas they could have more revenue taxed if they used accrual basis since it would even take into account the revenue for which the firm is still waiting it receive money, for example the sales paid with credit card. This may be an advantage to cash accounting but it is also an accrual accounting disadvantage since if a firm uses it, it will have to pay taxes for money that the firm has yet to receive. All in all, a firm will have to decide whether it has to use accrual or cash accounting depending on the situation it is in, meaning for what purpose the financial statements are prepared for and for whom. But except for that many governments demand the firms to use accrual accounting for their taxation in their income. In general, accrual accounting is more widely acceptable and preferred to be used by firms. Bibliography Augustine Benedict & Barry Elliot, Financial Accounting An Introduction, 2011,
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