Final answer:
Statement d is incorrect: Under the cost-recovery method, subsequent income statements do not report the gross profit as a separate item of revenue; it is deferred until costs are recovered. This involves understanding the difference between accounting profit and economic profit, crucial for financial decisions. d. Subsequent income statements report the gross profit as a separate item of revenue when it is recognized as earned.
Step-by-step explanation:
The question is about the cost-recovery method of accounting, which is used when the collectability of revenue from a sale is uncertain. Specifically, it pertains to revenue recognition and how different elements like costs recovered, interest, and deferred gross profit are handled under this method.
Under the cost-recovery method, statement a is correct: After all costs have been recovered, any additional cash collections are truthfully included in income. Statement b is also correct as interest revenue can indeed be recognized even before all costs are fully recovered. Statement c represents a correct accounting treatment, where the deferred gross profit is offset against the receivable on the balance sheet. However, statement d is not correct because, under the cost-recovery method, subsequent income statements do not report the gross profit as a separate item of revenue; instead, gross profit recognition is deferred until the cost has been fully recovered.
Understanding accounting profit versus economic profit is crucial in business, as accounting profit pertains to total revenue minus explicit costs and economic profit accounts for both explicit and implicit costs. Businesses rely on these profits and their revenue stream to make credible promises to pay interest when they decide on borrowing methods, such as through banks or bonds.