Question

Under the installment-sales method,

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

Option b is the correct answer under the installment-sales method, where gross profit is deferred proportionate to the uncollected cash from the sale while total revenues and costs are recognized at the sale point.

Step-by-step explanation:

Under the installment-sales method, the correct answer is option b: 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 means while the total sale value and the costs associated with the product are recognized when the sale occurs, the gross profit is only recognized as the cash is received. Revenue is the total income generated (Total Revenue = Price x Quantity), and the cost includes all expenses related to production. This method is important for recognizing revenue and costs in a way that reflects the actual cash flow and matches income with the periods in which the cash is collected, thus giving a more accurate financial picture over time.