Question

When does a company receive cash before recognizing the associated revenue?

1) Before the revenue is earned
2) After the revenue is earned
3) At the same time as the revenue is recognized
4) Cannot be determined

Answer 1

A company may receive cash before recognizing the associated revenue in situations where customers pay in advance for goods or services, such as prepaid subscriptions or retainer fees.

Step-by-step explanation:

A company may receive cash before recognizing the associated revenue when revenue is earned through advance payments or prepayments. This commonly occurs in situations where customers pay for goods or services in advance. Examples include prepaid subscriptions, retainer fees, or advance payment for an order placed.

For instance, a customer may pay for a one-year magazine subscription at the beginning of the year. The company receives the cash upfront, but the revenue is recognized over the course of the year as the magazines are delivered to the customer.