Final answer:
The cost recovery method of revenue recognition is used when there's a high uncertainty about collecting revenue, especially in cases with high credit risk. It defers the recognition of profit until the costs are recovered through cash payments. This is encompassed by a thorough understanding of explicit and implicit costs, which affect overall cost and revenue analysis.
Step-by-step explanation:
The cost recovery method of revenue recognition is used in situations where there is a high uncertainty regarding the collection of revenue. This method is typically employed when selling products or services to customers with poor credit, when the receipt of cash is doubtful, or in other high-risk circumstances. Under this method, no profit is recognized until the costs of the goods sold are fully recovered through cash payments.
Now, regarding the explicit and implicit costs, explicit costs refer to direct, out-of-pocket expenses that a company incurs in conducting its business—such as wages, rent, and materials. On the other hand, implicit costs are indirect costs which represent the opportunity costs of utilizing resources owned by the company that could have been put to another use.
Clearly understanding both types of costs is essential, as they play a critical role in cost and revenue analysis. The relationship between cost and revenue is fundamental in determining the profitability of a company. Different revenue recognition methods, such as the cost recovery method, can significantly affect the timing of when revenue and profit are recognized.