Question

Under the installment-sales method, revenue, costs, and gross profit are recognized ________?

1) proportionate to the cash that is received from the sale of the product
2) proportionate to cash uncollected from sale of the product, but total revenues and costs are recognized at the point of sale
3) not until the amount of cash received exceeds the cost of the item sold
4) proportionate to the cash received from the sale of the product, but gross profit is deferred until all cash is received

Answer 1

Under the installment-sales method, revenue, costs, and gross profit are recognized proportionate to cash uncollected from the sale of the product, but total revenues and costs are recognized at the point of sale.

Step-by-step explanation:

The correct answer is option 2) proportionate to cash uncollected from the sale of the product, but total revenues and costs are recognized at the point of sale.

Under the installment-sales method, revenue, costs, and gross profit are recognized at the point of sale, but the revenue and costs are proportionate to the cash uncollected from the sale of the product. This method allows for recognizing revenue and costs over a longer period of time as cash is collected.

For example, if a product is sold for $100 with $50 cash received upfront and $50 to be collected in the future, the revenue and costs would be recognized at $50 at the point of sale, and the remaining $50 would be recognized as cash is collected.