Financial Accounting and Reporting-CPA Practice Exam

Which of the following is not a comprehensive basis of accounting other than generally accepted accounting principles?

1. Basis of accounting used by an entity to comply with financial reporting requirements of a government regulatory agency

2. Cash receipts and disbursements basis of accounting

3. Basis of accounting used by an entity to file its income tax return

4. Basis of accounting used by an entity to comply with financial reporting requirements of a lending institution

The correct answer is: Basis of accounting used by an entity to comply with financial reporting requirements of a lending institution

The selected answer is correct because the basis of accounting used by an entity to comply with financial reporting requirements of a lending institution typically aligns with generally accepted accounting principles (GAAP), rather than comprising an alternative basis of accounting. Lending institutions generally require financial statements prepared in accordance with GAAP to ensure consistency and comparability in financial reporting. This requirement stems from the need for accurate and reliable financial data to assess the creditworthiness of borrowers. In contrast, the other options represent alternative bases of accounting that do not adhere to GAAP. For instance, the cash receipts and disbursements basis of accounting is a specific method that focuses on cash transactions, which does not completely encompass the accrual basis required by GAAP. Similarly, the basis of accounting used when filing an income tax return often differs from GAAP, as entities may use tax reporting methods that optimize tax liabilities rather than aligning with GAAP standards. Lastly, the basis of accounting for compliance with a government regulatory agency might vary widely depending on specific regulations, but is still typically categorized as a non-GAAP basis due to its focus on regulatory requirements rather than general accounting standards.