Question

The realization of income on installment sales transactions involves

a. recognition of the difference between the cash collected on installment sales and the
cash expenses incurred.
b. deferring the net income related to installment sales and recognizing the income as
cash is collected.
c. deferring gross profit while recognizing operating or financial expenses in the period
incurred.
d. deferring gross profit and all additional expenses related to installment sales until cash is ultimately collected.

Answer 1

Income realization on installment sales involves deferring the net income related to installment sales while recognizing income as cash is collected, and recognizing expenses when they are incurred, rather than deferring them.

Step-by-step explanation:

The realization of income on installment sales transactions typically involves deferring the net income related to installment sales and recognizing the income as cash is collected. This method, known as the installment sales method, allows businesses to recognize revenue over the period in which cash payments are received rather than at the point of sale.

More specifically, under the installment sales method, companies defer gross profit on the sale of goods or services and recognize it in proportion to the cash collected from customers over time. However, operating or financial expenses directly related to the sale are recognized in the period they are incurred. Thus, while perceived gross profit from the installment sales is deferred, the related expenses are not, which helps to match expenses with the revenues they help to generate.