Certified Nonprofit Professional Practice Exam

Cash basis accounting reports the funds received and disbursed in a reporting period and ignores future expected transactions. Is this statement true or false?

1. True

2. False

3. Depends on the organization

4. Only true for large nonprofits

The correct answer is: True

The statement is true. Cash basis accounting is a method used in financial reporting where revenues are recognized when cash is actually received, and expenses are recorded when cash is paid out. This approach focuses solely on actual cash transactions that occur within the reporting period, completely disregarding any future expected income or expenses that have not yet been realized in cash form. In the context of nonprofits, this means that if the organization is expecting to receive funds or incur expenses in the future, those amounts will not be reflected in the financial statements until the cash is received or paid. This simplicity in the recording process makes cash basis accounting straightforward for organizations, especially smaller nonprofits that may not have the resources to implement more complex accounting methods. Unlike accrual accounting, which records revenues and expenses when they are earned or incurred regardless of cash flow, cash basis accounting provides a clearer picture of the cash position of the organization at any given point in time, but it does not give a full financial picture in terms of commitments and future obligations. Therefore, the statement accurately describes the characteristics of cash basis accounting.