Question

Under cash-basis accounting, companies typically record revenue:

a.In the period in which we provide goods and services to customers.
b.In the period in which customers order goods and services.
c.In the period in which we received cash from customers for goods and services.
d.In the period in which goods and services are prepared to be sold to customers.

Answer 1

Companies using cash-basis accounting record revenue when they receive cash from customers for goods and services, affecting the company's accounting profit, which is different from economic profit that takes into account both explicit and implicit costs.

Step-by-step explanation:

Under cash-basis accounting, companies typically record revenue in the period in which they received cash from customers for goods and services. This method contrasts with accrual accounting, where revenue is recorded when it is earned, regardless of when the cash is received. The timing of revenue recognition under cash-basis accounting is directly tied to cash flows, which is important for understanding concepts like accounting profit and economic profit.

Accounting profit is the total revenue minus explicit costs, representing the difference between dollars brought in and dollars paid out. On the other hand, economic profit includes both explicit and implicit costs, considering revenue minus the total cost, which can impact the long-term sustainability of a company beyond just the immediate cash flow.