CFI Financial Modeling And Valuation Analyst (FMVA) Practice Exam

In cash accounting method, when are income and expenditures recorded?

record income and expenditures at the time the money changes hands record income when earned and expenditures when incurred record on a cash basis but only annually record revenues when accrued

Correct Answer:

record income and expenditures at the time the money changes hands

Explanation:

Under cash accounting, income and expenditures are recorded when cash actually changes hands. Income is recognized when cash is received and expenses are recognized when cash is paid out. This timing mirrors real cash flow and is simpler for many small businesses. In contrast, accrual accounting records revenues when earned and expenses when incurred, regardless of cash movement. Descriptions about recording on a cash basis only annually or recording revenues when accrued describe accrual timing or a misfit for cash accounting, not how cash accounting works.

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