Multiple Choice
Using the top-down approach, operating cash flow (OCF) is calculated by subtracting costs and which of the following from sales?
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3. Accrual Accounting Concepts
Revenue Recognition and Expense Recognition
Multiple Choice
According to GAAP, when is revenue recognized on an income statement?
A
At the end of the fiscal year, regardless of earning or collection
B
When it is earned and realizable, regardless of when cash is received
C
When the related expenses are paid
D
Only when cash is received from customers
Verified step by step guidance1
Understand the core principle of revenue recognition under GAAP (Generally Accepted Accounting Principles). Revenue is recognized when it is earned and realizable, not necessarily when cash is received.
Break down the key terms: 'earned' means the company has completed the performance obligations (e.g., delivered goods or services), and 'realizable' means there is reasonable assurance that payment will be received.
Eliminate incorrect options: Revenue is not recognized at the end of the fiscal year unless it meets the criteria of being earned and realizable. Similarly, revenue recognition is not tied to the payment of related expenses or the receipt of cash.
Focus on the accrual basis of accounting, which GAAP follows. This basis ensures that revenue is recorded in the period it is earned, aligning with the matching principle to provide an accurate financial picture.
Conclude that the correct answer is: 'When it is earned and realizable, regardless of when cash is received,' as this aligns with GAAP's revenue recognition criteria.
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