Income Recognition on a Cash Basis

a. For each of the following, indicate whether it would normally be appropriate or inappropriate for a company to recognize income measured on the cash basis. Explain your answer.

1. Financial statements are prepared for an individual or small business.

2. Financial statements are to be prepared in accordance with generally accepted accounting principles.

3. Sales are made on a “cash only” basis.

4. Payments for parts and labor are made as work progresses. Final products require three years to complete.

b. There are three alternative possibilities with respect to the timing of the receipt of cash from a sale. Identify the three alternative possibilities and the alternative under which cash-basis income 1s appropriate.