A.

Information about business earnings based on accrual accounting generally provides a better indication of an enterprises present and continuing ability to generate cash flows than information limited to financial effects of cash receipts and payments (cash basis). Do you agree? Provide reasons to support your answer. Agree. 1. Briefly tell what accrual basis is. It allocates transactions producing cash flows to time period. It means that just recognizes the revenue when it realized which comply with realization concept and recognize expenses when it incurred which comply with matching concept. 2. Give a situation that involves cash flow, assets, liabilities and income. The recognition of revenues and expenses based on accrual basis instead of cash basis is actually has corollary effect on the BS. It means that the differences between the income recognized and actual cash flow for the period are accrued as assets or liabilities. For an example: 1/1/11- Purchase merchandises at RM10 31/12/11- Sold it at RM12 on credit and cash will be collected in next year 2012 Actual cash outflow on 2011 is RM10 that acquired merchandises at 1/1/2011 Revenue is recognized at the time of sale, even though the cash is not received yet, treated as future cash flow. The future cash flow is reported as an increase of RM12 in the asset account receivable. Thus, income can be derived from the different between the change in assets plus actual cash flows: Income = RM12 RM10 = RM2 Aforementioned example is a proof for accrual basis is a better indicator of the earning power of the firm and its ability to generate future cash flows. Moreover, it also comply with matching principle, which states that operating performance can be measured only if related revenues and expenses are accounted for during the same time period.

B. Briefly explain the strengths and weaknesses of accrual basis. Strengths: It results in more meaningful measurement of current operating performance A better indicator of future operating performance and earning power Weaknesses: The amount and timing of accruals are subject to mgmt. discretion and are based on assumptions and estimates that can be changed over time.