Q19. Why will Cash Inflows and Cash Outflows not always be exactly equal to Revenues and Expenses?

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Q19. Why will Cash Inflows and Cash Outflows not always be exactly equal to Revenues and Expenses?

BlackTom AI · Accepted Answer

Consider the relationship between cash flows and reported revenues/expenses in accounting.
Option 1: 'Cash flows and revenues and expenses should always equal.' This is not true in general because companies recognize revenues and expenses when earned or incurred (accrual basis), while cash flows reflect actual cash receipts and payments. Timing differences due to accruals/deferrals mean they won’t always align.
Option 2: 'Cash flows are completely different to revenues and expenses, so they will never equal.' While they are different in timing, they can coincide in some periods when cash received matches revenue recognized or cash paid matches expense recognized. Saying they will never equal is too absolute.
Option 3: 'Only errors in the accounting entry will cause cash inflows and outflows to differ from revenues and expenses.' This is incorrect because even with perfect entries, accrual accounting creates timing differences between when cash moves and when revenues/expenses are recognized, independent of any error.
Option 4: 'Accruals and deferrals will cause cash flows to differ from revenues and expenses.' This is accurate because accruals (revenues earned but not yet received, expenses incurred but not yet paid) and deferrals (cash received/paid before revenue/expense is recognized) create the usual timing gaps between cash flow and the related revenue or expense recognition, leading to differences between the two measures.

22730 Auditing and Assurance Services - Spring 2025 Prerequisite Accounting Quiz

Q19. Why will Cash Inflows and Cash Outflows not always be exactly equal to Revenues and Expenses?

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