Federal Nursing Home Administrator Practice Exam

Which of the following is an advantage of cash accounting?

1. Recognizes accounts receivable and payable

2. Simple and easy to understand

3. Accurate reflection of net income

4. Includes depreciation in reporting

The correct answer is: Simple and easy to understand

Cash accounting is favored for its simplicity and ease of understanding. In this method, transactions are recorded only when cash changes hands—meaning revenue is recorded when cash is received, and expenses are recorded when cash is paid out. This straightforward approach allows businesses, especially smaller ones or those with less complex financial activities, to maintain their financial records without needing extensive accounting knowledge. Furthermore, cash accounting provides clarity when it comes to cash flow, since it directly tracks the actual cash transactions. This can be especially beneficial for new entrepreneurs or small business owners who may not have the resources for more complicated accounting methods. While other options involve elements of accounting practices like recognizing accounts receivable or incorporating depreciation, these are features of accrual accounting rather than cash accounting. This highlights how cash accounting prioritizes immediate cash activity over long-term financial obligations or asset depreciation, reinforcing why its simplicity is its most notable advantage.