Which of the following statements about the modified cash basis is true?

• A. It records revenue when cash is received and capitalizes fixed assets
• B. Revenue is recognized when earned and expenses when incurred
• C. It is identical to accrual accounting
• D. It does not capitalize fixed assets

Answer: (C)

Modified cash basis blends cash-based timing with asset capitalization. It records revenue when cash is received and expenses when cash is paid, and it capitalizes fixed assets (depreciating them over time) rather than expensing them all at purchase. This mixes elements of cash basis and accrual basis, so it is not identical to accrual accounting, which recognizes revenue when earned and expenses when incurred regardless of cash flow—and in accrual, depreciation is part of the ongoing asset accounting. So the statement that it’s identical to accrual isn’t correct. A complete view is that it uses cash timing for most items but treats fixed assets differently by capitalizing and depreciating them.