Question

In week 5, What is your mumbo jumbo conclusion, in regards to when the revenues should be recognized?

a) Revenues should always be recognized on a cash basis
b) Revenues should be recognized when earned and realizable
c) Revenues should be recognized only at the end of the fiscal year
d) Revenues should be recognized based on shareholder preferences

Answer 1

Revenues should be recognized when earned and realizable.

Step-by-step explanation:

In the context of revenue recognition, it is generally accepted that revenues should be recognized when earned and realizable. This means that revenues should be recognized when the transaction or service has been completed, and the payment for that transaction or service is reasonably assured.

For example, if a company sells a product to a customer, the revenue should be recognized at the point of sale, even if the customer has not yet paid for the product.

This is because the sale has been completed and the payment is expected to be received in the future.

Revenues should not be recognized on a cash basis (option a), only at the end of the fiscal year (option c), or based on shareholder preferences (option d), as these approaches do not accurately reflect the matching principle and the economic substance of the transaction.