In comparing accrual accounting with cash-basis accounting, the primary disadvantage of accrual accounting is that it:

• A. records revenues and expenses only when cash is received or paid
• B. cannot be used to prepare financial statements in accordance with GAAP for external reporting
• C. may require reporting income taxes on revenue that has been earned but not yet collected in cash
• D. eliminates the need to estimate uncollectible accounts and record bad debt expense

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the key difference between accrual accounting and cash-basis accounting. Accrual accounting records revenues and expenses when they are earned or incurred, regardless of when cash is received or paid, while cash-basis accounting records transactions only when cash changes hands.
2. Step 2: Recognize that accrual accounting is required by GAAP (Generally Accepted Accounting Principles) for external financial reporting, so the statement that it cannot be used to prepare GAAP financial statements is incorrect.
3. Step 3: Consider the implications of accrual accounting on income tax reporting. Since revenues are recorded when earned, a company may have to report income taxes on revenues that have been recognized but not yet collected in cash, which can create a cash flow timing issue.
4. Step 4: Note that accrual accounting does not eliminate the need to estimate uncollectible accounts or record bad debt expense; in fact, it requires these estimates to properly match expenses with revenues.
5. Step 5: Conclude that the primary disadvantage of accrual accounting is related to the potential tax liability on earned but uncollected revenue, which can affect cash flow management.