Certified Meeting Professional (CMP) Practice Exam

What characteristic of net worth can be determined from an accrual accounting standpoint?

1. Current cash availability

2. Current and future expenses only

3. Completeness of financial obligations

4. Immediate cash flows only

The correct answer is: Completeness of financial obligations

The correct choice reflects the comprehensive understanding of net worth from an accrual accounting perspective. Accrual accounting focuses on recognizing revenues and expenses when they are incurred, regardless of when cash is exchanged. This means that a complete picture of an entity's financial health includes not just current cash on hand but also all outstanding financial obligations, whether settled in cash now or in the future. By determining the completeness of financial obligations, one can assess the true financial liability of an entity compared to merely evaluating its available cash or immediate cash flows. This broader scope allows stakeholders to understand the overall financial position, including what is owed and expected against the backdrop of existing assets. This comprehension aligns with how accrual accounting is structured, ensuring that net worth reflects both current conditions and potential future scenarios. The focus on cash availability or immediate cash flows would provide only a partial view of an organization’s financial standing and does not account for the totality of obligations that could impact future financial position.