Question

Compared to the accrual basis of accounting, the cash basis of accounting overstates income by the net increase during the accounting period of the

Accounts Receivable      Accrued Expenses Payable

No                               No

No                              Yes

Yes                            No

Yes                           No

Yes No Yes Yes

Answer 1

Correct answer-----------No     Yes.

.No for accounts receivable and Yes for accrued expenses payable.

.

When accounts receivable increase the accrual accounting gives higher revenue than cash basis. Because bash basis do not record accounts receivable but only cash received. The lower revenue in cash basis understate net income.

The increase in accrued expense payable in accrual accounting will show lower net income as compared to cash basis.

This is because cash basis net expenses will be lower and hence cash basis will overstate net income.