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

Which accounting bases are permissible for preparing financial statements under a comprehensive basis of accounting other than generally accepted accounting principles?

1. Only the cash receipts and disbursements basis

2. Only the income tax basis of accounting

3. Both the income tax basis and cash receipts and disbursements basis

4. Neither of the above

The correct answer is: Only the cash receipts and disbursements basis

The comprehensive basis of accounting other than generally accepted accounting principles includes various methods that an entity can use to prepare its financial statements, provided they are sufficient to give a fair representation of the entity's financial condition and results of operations. When considering the cash receipts and disbursements basis, this method records financial events only when cash is received or paid. This is a simpler approach often used by smaller entities or in specific sectors where accrual accounting may be more complicated or unnecessary. The income tax basis of accounting allows entities to prepare their financial statements in a manner consistent with their tax reporting requirements. This basis is commonly used because it aligns with the income tax regulations, making it familiar to many businesses and more relevant for stakeholders concerned with tax obligations. While both the cash receipts and disbursements basis and the income tax basis are permissible under comprehensive basis of accounting other than GAAP, the answer identifies the cash receipts and disbursements basis exclusively. However, a complete understanding should recognize that the other basis can also be permissible under this comprehensive framework. Therefore, the correct answer is more comprehensive than just the cash receipts and disbursements basis; both the income tax basis and the cash receipts and disbursements basis are acceptable,