What is a disadvantage of cash basis accounting compared to accrual basis accounting?

The choice highlighting that cash basis accounting shows only what has been collected and paid out accurately captures a significant limitation of this method. Cash basis accounting recognizes revenue and expenses only when cash actually changes hands. This means that if services have been provided but payment has not yet been received, or if expenses have been incurred but not yet paid, these figures will not appear in the current financial statement. As a result, businesses may not have a complete picture of their financial health at any given time, since their income and expenses can be significantly misrepresented, especially in periods of fluctuating cash flow.

On the other hand, accrual basis accounting provides a more comprehensive view of a company's financial status by recognizing revenue and expenses when they are incurred, regardless of cash transactions. This approach helps in better financial planning and management because it reflects the actual operations of the business, leading to clearer insights into profitability and cash flow needs.

Other options do not accurately describe a disadvantage of cash basis accounting when compared to accrual basis accounting, as tracking accounts payable and managing inventory is not necessarily relevant to the simplicity or advantages of cash basis accounting. Moreover, many consider cash basis accounting to be simpler than accrual basis accounting, not more complex.