Certified Meeting Professional (CMP) Practice Exam

What does cash accounting fail to recognize?

1. Future cash inflows

2. Promises to pay and expectations of revenue

3. Non-cash expenses only

4. Only cash transactions

The correct answer is: Promises to pay and expectations of revenue

The correct understanding of cash accounting focuses on the principles governing recognition of revenue and expenses. Cash accounting fails to recognize promises to pay and expectations of revenue because it records financial transactions only when cash is actually exchanged. This means that any receivable amounts or future revenue, even if assured through contracts or agreements, are not recorded until payment is made. This can lead to an incomplete picture of an entity's financial health, as it does not account for expected future benefits from transactions that haven't yet resulted in cash flow. In contrast, cash accounting does recognize cash transactions, including both cash inflows and cash outflows as they occur, which is why the alternative choices do not align with the specific aspect of cash accounting in question. The failure to account for future cash inflows or non-cash expenses is secondary to its primary limitation regarding recognizing promises or future expectations related to revenue.