Certified Financial Management Specialist Practice Exam

In cash accounting, transactions are recorded when:

1. Expenses are incurred

2. Cash is received or paid

3. Contracts are signed

4. Invoices are issued

The correct answer is: Cash is received or paid

In cash accounting, transactions are recorded when cash is received or paid. This method focuses solely on the actual inflows and outflows of cash, rather than the obligations or rights that may exist as a result of transactions. For example, revenue is recognized when cash is received, and expenses are recorded when cash is actually paid out. This approach provides a straightforward view of an entity's cash flow, making it easier for businesses to manage their liquidity and assess their financial health based on the cash available at any given time. By contrast, expenses being incurred or contracts being signed do not trigger a recording in cash accounting, as no cash movement has taken place. Similarly, issuing invoices relates to accrual accounting, where revenues and expenses are recognized regardless of cash transactions. In cash accounting, the timing of cash flow is what dictates when financial events are recorded.