Question

The Rowe Company is a restaurant in a remote area of Tennessee. The owner buys a steak from a local farmer for $7. The chef is paid $2 to cook this meat. A waitress is paid $1 to deliver the steak to the customer. The customer is charged $18, which is paid in cash. The customer leaves a tip for the waitress of $3. According to U.S. GAAP, what amount of revenue should the Rowe Company report in connection with this series of events?

a. $21 b. $10 c. $13 d. $18

Answer 1

The Rowe Company should report $18 as revenue, as U.S. GAAP dictates that only the amount the customer is charged for the food counts as revenue, not including tips.

Step-by-step explanation:

The Rowe Company should report $18 in revenue according to U.S. GAAP. In this scenario, tips are not considered revenue for the restaurant but are rather a direct transaction between the customer and the waitress. Therefore, only the amount charged for the product or service, which is the cost of the steak ($18), is recorded as revenue on the restaurant's books.

It's important to distinguish between the cost of goods sold (COGS) and operating expenses, such as the chef's wage ($2) and the waitress's wage ($1), which do not directly affect the revenue figure. The payment method, whether cash or credit, does not impact the revenue recognition.