Question

Revenue generally should be recognized?

1) at the end of the accounting period
2) when cash is received
3) when goods or services are provided
4) when the customer requests it

Answer 1

Revenue should be recognized when goods or services are provided, following the accrual basis of accounting. Total revenue is important for calculating both accounting and economic profits, with the latter considering both explicit and implicit costs.

Step-by-step explanation:

Revenue should generally be recognized when goods or services are provided. This is known as the accrual basis of accounting, which matches revenue with the accounting period in which it is earned, regardless of when payment is received. In contrast, the cash basis of accounting recognizes revenue only when cash is received, which does not always provide a clear picture of a company's financial performance.

Total revenue is calculated by multiplying the product's price by the quantity sold. For example, if a company sells 100 units of a product at $10 each, the total revenue would be 100 x $10 = $1000. This measurement is crucial for understanding both accounting profit, which is total revenue minus explicit costs, and economic profit, which also considers implicit costs.

It's worth noting that while taxes based on accounting profit can influence a business's cash flow, economic profit ultimately indicates the economic success of a business.