Which of the following best describes the cash basis accounting method?

Cash basis accounting is characterized by recording transactions only when cash changes hands. This method focuses on the actual inflow and outflow of cash, meaning that revenues are recognized at the moment cash is received, and expenses are recognized when cash is paid out. This approach contrasts with accrual basis accounting, where revenues and expenses are recorded when they are earned or incurred, regardless of when cash is exchanged.

In cash basis accounting, financial statements reflect the real cash flow situation of a business, which can be particularly useful for small businesses and individuals managing their finances on a simpler level. This method does not provide a comprehensive view of a company's overall financial health in terms of obligations or receivables since it overlooks transactions that have occurred but have not yet involved cash movement.

Other options address different principles of accounting or requirements that do not relate to the cash basis method. For instance, recognizing revenue when it's earned pertains to accrual accounting, and requiring financial audits is more associated with compliance and reporting standards rather than the cash basis itself.