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

• A. It records revenue when cash is received and capitalizes fixed assets
• B. It records revenue when earned and expenses when incurred
• C. It is identical to the accrual accounting
• D. It ignores fixed assets

Answer: (A)

This question tests how the modified cash basis handles timing for revenue and the treatment of fixed assets. Under this approach, revenue is recognized when cash is actually received, and long-lived assets like fixed assets are capitalized on the balance sheet (not expensed) and then depreciated over time. So a statement that says revenue is recorded when cash is received and fixed assets are capitalized aligns with the modified cash basis.

It isn’t the same as accrual accounting, which records revenue when earned and expenses when incurred. It also doesn’t ignore fixed assets; in fact, fixed assets are capitalized, which is a key feature of this basis.