Which statement about GAAP rules and income statements is true?

Which statement about GAAP rules and income statements is true?

• A. They can cause numbers on the income statements not to reflect actual cash outflows
• B. They guarantee exact cash outflows
• C. They always show fixed and variable costs separately
• D. They exclude depreciation from costs

Answer: (A)

GAAP income statements are prepared on an accrual basis, recognizing revenues when earned and expenses when incurred, not when cash actually moves. That means net income can reflect the timing of transactions and include non-cash items like depreciation, which reduce reported income without a current cash outflow. Because of this, the numbers on the income statement may not reflect the actual cash outlays during the period; the cash movements are shown in the cash flow statement. Depreciation is included as an expense on the income statement, even though it is a non-cash item. GAAP does not require showing fixed and variable costs separately on every income statement, so that separation isn’t guaranteed.