Cash, Modified Cash, Income Tax Basis

Question 1

What accounts show up on the balance sheet of a company using the cash basis?

Answer 1

A balance sheet for a company using the pure cash basis would show only Cash and Equity. No other assets or liabilities are shown because cash received is recognized as revenue (Dr Cash Cr Revenue) and cash paid is recognized as expense (Dr Expense Cr Cash).

Question 2

A modified cash basis is acceptable if the modification(s) have substantial support in practice. Substantial support likely would be established if what 2 conditions are met?

Answer 2

1. The modification is equivalent to an element of accrual basis accounting, and
2. The modification is logical and consistent with GAAP.

Question 3

When modifications to cash basis are made, all related accounts must be reported using the same method of accounting. e.g. If long-term assets are recognized you must recognize depreciation expense and accumulated depreciation. If debt is recognized related interest expense (accrued and paid) must be recognized.

Answer 3

.

Question 4

Income tax basis financial statements result from using the federal income tax rules and regulations that a firm uses, or expects to use, in filing its income tax return. When are the effects of events on a business recognized?

Answer 4

Under the income tax basis of accounting the effects of events on a business recognized when taxable income or deductible expense would be recognized on the income tax return.

Question 5

When the cash basis or the modified cash basis of accounting is used, the title income statement should be replaced by the title Statement of Cash Receipts and Cash Disbursements. The title Balance Sheet may still be used.

Answer 5

.