Certified Meeting Professional (CMP) Practice Exam

What does cash accounting involve?

1. Counting profits at the end of the fiscal year

2. Counting income and expenses as they are actually received and paid

3. Counting projected income based on sales forecasts

4. Counting income at the moment of invoice generation

The correct answer is: Counting income and expenses as they are actually received and paid

Cash accounting is a method that records income and expenses when they are actually received and paid, rather than when they are incurred. This approach provides a clear picture of cash flow at any given moment, reflecting real financial activity based on transactions completed in cash or through other means of payment, such as credit cards. This method is particularly beneficial for smaller businesses or those with straightforward financial transactions, as it simplifies the accounting process and helps in managing liquidity – providing immediate insight into available cash without the complexities of accounts receivable or payable that other accounting methods might incur.