CFI Financial Modeling And Valuation Analyst (FMVA) Practice Exam

This tests a cash-based timing approach to recognizing revenues and expenses. Recording revenues and expenses only when cash actually changes hands is cash-basis (cash flow) accounting. It focuses on when cash inflows and outflows occur, rather than when the underlying economic events happen. Under this method you don’t record a sale until cash is received, and you don’t record a purchase until cash is paid. This is different from accrual accounting, where revenue is recognized when earned and expenses when incurred, regardless of cash movements, which is why accounts like Accounts Receivable and Accounts Payable are central in that framework. Inventory matters for asset and cost tracking, but it doesn’t define the timing rule. So the described system aligns with the Cash Flow Accounting System.