Generally accepted accounting principles require accrual-basis accounting.

• A. True
• B. False
• C. Cannot be determined
• D. Only for cash-b basis entities

Answer: (A)

GAAP requires financial statements used for external reporting to be prepared on an accrual basis. This means revenue is recognized when earned and expenses are recognized when incurred, not when cash is received or paid. The accrual approach aligns revenues with the periods in which they help generate them and matches related expenses to those same periods, giving a more accurate view of a company’s performance and financial position. Cash-basis accounting records only cash transactions, which can distort profitability and asset/liability levels, so it isn’t the GAAP method for external statements. Therefore, accrual-basis accounting is required. The other options don’t fit because GAAP does not mandate cash-basis for external reporting, nor does it leave the requirement indeterminate, and it isn’t limited only to cash-basis entities.