Certified Government Financial Manager (CGFM) Practice Exam 2025 – Your All-in-One Guide to Exam Success!

The accrual basis of accounting recognizes revenues when they are earned, regardless of when cash is received, and expenses when they are incurred, regardless of when cash is paid. This accounting method provides a more accurate representation of a company's financial position and performance during a specific period since it matches revenues to the period they relate to and recognizes expenses in the same period they contribute to the generation of those revenues.

This approach contrasts with the cash basis of accounting, which recognizes revenues only when cash is received and expenses only when cash is paid. The modified accrual basis, commonly used in government accounting, combines elements of both cash and accrual accounting, recognizing revenues when they are measurable and available and expenses when incurred, but with certain limitations. The regulatory basis relates to specific rules set by governing bodies and does not have a fixed method of revenue and expense recognition, making it distinct from the accrual and modified accrual bases. Therefore, the accrual basis is the correct choice as it embodies the principles of recognizing revenues and expenses based on their earned or incurred status rather than the cash flow timing.