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?