Federal Nursing Home Administrator Practice Exam

What is a primary disadvantage of accrual accounting?

1. It is simplistic in nature

2. It can be difficult to manage

3. It lacks documentation

4. It does not consider cash flow

The correct answer is: It can be difficult to manage

Accrual accounting recognizes revenue and expenses when they are incurred, regardless of when cash transactions occur. This method provides a more accurate picture of a company's financial position over time but can be complex and challenging to manage. One of the primary disadvantages is that it requires careful tracking of all accounts receivable and payable, as well as regular adjustments to record expected revenues and expenses. This level of detail can complicate bookkeeping, making it harder for managers to quickly assess cash flow or make immediate operational decisions based on actual cash in the bank. While the other options highlight aspects that may be perceived as disadvantages, they do not capture the overarching complexity of managing the intricacies of accrual accounting. For example, while accrual accounting is more comprehensive than simplistic approaches, its detailed nature necessitates thorough understanding and diligent management, which can introduce challenges that are not present with simpler accounting methods. Additionally, although cash flow considerations are a critical aspect of financial management, accrual accounting itself does account for cash flow in its own way through the matching principle.