E3-2 On numerous occasions, proposals have surfaced to put the federal government on the accrual basis of accounting. This is no small issue. If this basis were used, it would mean that billions in unrecorded liabilities would have to be booked, and the federal deficit would increase substantially.

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(a) What is the difference between accrual-basis accounting and cash-basis accounting?

(b) Why would politicians prefer the cash basis over the accrual basis?

(c) Write a letter to your senator explaining why the federal government should adopt the accrual basis of accounting.

Compute cash and accrual accounting income.

(LO 1)