Question

Under the installment-sales method:

Select one:
A. revenue, costs, and gross profit are recognized proportionate to the cash that is received from the sale of the product
B. gross profit is deferred proportionate to cash uncollected from sale of the product, but total revenues and costs are recognized at the point of sale
C. gross profit is not recognized until the amount of cash received exceeds the cost of the item sold
D. revenues and costs are recognized proportionate to the cash received from the sale of the product, but gross profit is deferred until all cash is received.

Answer 1

Gross profit under the installment-sales method is deferred proportionate to cash uncollected, with revenues and costs recognized at the point of sale.

Step-by-step explanation:

Under the installment-sales method, answer B is correct; gross profit is deferred proportionate to cash uncollected from the sale of the product, but total revenues and costs are recognized at the point of sale. This accounting approach recognizes that while the revenue is earned when the sale is made, the corresponding cash flow may occur over a period of time as the customer makes installment payments. Therefore, while the sale is recorded at the time of the transaction, the gross profit recognized at any point is based on the proportion of total sales price that has been received in cash.

For instance, if a company sells a product for $1000 on installment and the cost of the product is $700, the total revenue and the cost are recognized immediately. However, if the customer has only paid $200 up to a certain point, then only 20% of the gross profit (which is revenue minus cost, or $300 in this example) is recognized. This means that $60 of gross profit would be recognized at that point. The rest of the gross profit is recognized as further installments are paid.