Which statement best describes the relationship between accrual accounting and cash flow?

• A. Accrual accounting recognizes revenues and expenses when earned or incurred, regardless of cash receipts or payments
• B. Cash accounting recognizes revenue when cash is received
• C. Accrual accounting ignores non-cash transactions
• D. Cash flows are independent of accrual accounting

Answer: (A)

Accrual accounting recognizes revenues and expenses when earned or incurred, regardless of cash receipts or payments. This means net income reflects profitability based on when performance occurs, while actual cash flow can differ because cash may be received later or paid later, and because non-cash items like depreciation and amortization are included in earnings. The cash flow statement helps connect these two by showing the actual cash movements and reconciling them to reported earnings. So, the best description is that accrual accounting records timing of revenues and expenses independently from when cash is received or paid, which creates potential differences between reported income and cash flow. The other statements describe cash-basis timing, note that accrual includes non-cash items, and imply cash flow is unrelated to accrual, none of which capture the relationship as accurately.