How does accrual accounting benefit financial reporting?

Accrual accounting benefits financial reporting primarily by providing a clearer picture of profitability over time. This method recognizes revenues when they are earned and expenses when they are incurred, regardless of when cash transactions occur. As a result, it captures the true economic activities of a business, reflecting all earned revenues and incurred expenses within the appropriate accounting period. This allows stakeholders, such as investors and management, to better assess the company's financial performance and make more informed decisions.

By aligning revenues with the related expenses within the same accounting period, accrual accounting offers insights that cash accounting cannot, as the latter only records transactions when cash changes hands. This can lead to misinterpretations of a company's financial health, especially in cases where cash inflows and outflows do not correspond with the underlying operations of the business.

Therefore, the correct answer highlights the key advantage of accrual accounting in delivering a more accurate and comprehensive view of a company's profitability over time.