Auditing and Attestation- Certified Public Accountant (CPA) Practice Exam -

What is a suitable title for financial statements that are prepared on a cash basis?

1. Statement of operations.

2. Income statement.

3. Statement of revenues collected and expenses paid.

4. Statement of cash flows.

The correct answer is: Statement of revenues collected and expenses paid.

Selecting "Statement of revenues collected and expenses paid" as the suitable title for financial statements prepared on a cash basis accurately reflects the core principles of cash-basis accounting. In cash-basis accounting, revenue is recognized only when cash is received, and expenses are recognized only when they are paid. This method differs from accrual accounting, where revenues and expenses are recorded when they are earned or incurred, regardless of when cash transactions occur. By using the title "Statement of revenues collected and expenses paid," the financial statement clearly communicates that it focuses solely on cash transactions, providing a precise depiction of cash inflows and outflows within the reporting period. This title also emphasizes the operational aspect of how cash is managed and highlights the timing of cash movements, which is central to users of cash-basis financial statements. The other titles do not encapsulate the cash-basis nature as effectively. "Statement of operations" and "Income statement" are more traditionally associated with accrual accounting principles, reflecting a broader view of revenues and expenses that doesn't align with immediate cash transactions. Meanwhile, "Statement of cash flows" is generally used to describe a financial statement that details the cash inflows and outflows over a period, but it does not specifically highlight revenues and expenses