Federal Nursing Home Administrator Practice Exam

What is a key advantage of accrual accounting?

1. It simplifies the accounting process

2. It measures revenue earnings accurately after expenses

3. It requires fewer financial records

4. It ignores depreciation for ease of calculations

The correct answer is: It measures revenue earnings accurately after expenses

Accrual accounting is advantageous primarily because it provides a more accurate representation of a business's financial performance by recognizing revenue and expenses when they are incurred, rather than when cash is exchanged. This method aligns revenue recognition with the actual earning process, ensuring that the financial statements reflect all earned revenues and incurred expenses within a specific period. By evaluating performance in this way, stakeholders have a clearer insight into the business’s profitability and financial health during that timeframe. In contrast, while some may assume that accrual accounting simplifies the accounting process, it can actually involve more complex record-keeping as it requires tracking receivables and payables. Furthermore, it does not reduce the number of financial records needed; rather, it often necessitates maintaining more detailed records to keep track of the timing of transactions beyond cash flows. Ignoring depreciation would not align with the principles of accrual accounting, as depreciation is an important aspect of accurately reflecting the value of a company’s assets over time.