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

Which basis of accounting is considered an OCBOA?

1. Generally Accepted Accounting Principles (GAAP).

2. Modified cash basis of accounting.

3. International Financial Reporting Standards (IFRS).

4. Cash receipts and disbursements basis of accounting.

The correct answer is: Cash receipts and disbursements basis of accounting.

The cash receipts and disbursements basis of accounting is considered an Other Comprehensive Basis of Accounting (OCBOA) because it does not adhere to Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). OCBOA refers to various accounting frameworks that can be used as alternatives to GAAP. The cash receipts and disbursements method records revenues when they are received and expenses when they are paid. This straightforward approach is beneficial for certain entities because it provides a clear and simplified view of cash flows, which may be more relevant for some users of financial statements. It is particularly common among small businesses and not-for-profit organizations that may not need the complexity of full accrual accounting. In comparison, GAAP and IFRS involve more comprehensive and detailed accounting standards that require the recognition of revenues and expenses at the point of occurrence rather than just cash movement. The modified cash basis, while also an OCBOA, incorporates elements of accrual accounting, making it distinct from the pure cash receipts and disbursements basis. Therefore, the cash receipts and disbursements basis clearly fits the definition of an OCBOA due to its simplicity and focus solely on cash transactions.