In cash basis accounting, what do small entities such as physician offices rely on to assess their financial position?

• A. Income statements
• B. Bank account balances
• C. Balance sheets
• D. Investment reports

Answer: (B)

In cash basis accounting, small entities like physician offices primarily rely on bank account balances to assess their financial position. This approach focuses on actual cash flow, meaning that income is recorded when cash is received and expenses are recognized when cash is paid. This makes bank account balances a critical indicator of liquidity, as they reflect the cash available to the business at any given moment.

For small entities that often deal with limited resources and seek to maintain straightforward financial records, bank balances directly provide the most relevant information. These balances inform management about the funds available for ongoing operations, paying expenses, and investing in necessary resources.

Other financial statements, such as income statements or balance sheets, while useful in broader accounting practices, do not provide the immediate cash flow picture that small entities need in a cash basis framework. Investment reports are also less relevant in this context since they typically reflect longer-term financial data rather than immediate liquidity status.