Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

3. Accrual Accounting Concepts

Revenue Recognition and Expense Recognition

Financial Accounting

3. Accrual Accounting Concepts

Revenue Recognition and Expense Recognition

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Multiple Choice

Which of the following statements best aligns with the principles of effective revenue and expense recognition in financial accounting?

Revenue should be recognized when it is earned and realizable, and expenses should be recognized when they are incurred to generate that revenue.

Revenue should be recognized when an invoice is sent, and expenses should be recognized when payment is made.

Revenue and expenses should be recognized at the end of each fiscal year, regardless of when they are earned or incurred.

Revenue should be recognized only when cash is received, and expenses should be recognized only when cash is paid.

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Verified step by step guidance

Understand the principle of revenue recognition: Revenue should be recognized when it is earned and realizable, meaning the company has performed its obligations under a contract and there is reasonable assurance of payment.

Understand the principle of expense recognition: Expenses should be recognized in the same period as the revenue they help to generate, following the matching principle. This ensures that financial statements accurately reflect the company's performance.

Evaluate the first option: 'Revenue should be recognized when it is earned and realizable, and expenses should be recognized when they are incurred to generate that revenue.' This aligns with the principles of revenue and expense recognition in financial accounting.

Evaluate the second option: 'Revenue should be recognized when an invoice is sent, and expenses should be recognized when payment is made.' This does not align with the principles because revenue recognition depends on earning and realizability, not merely invoicing, and expense recognition depends on the matching principle, not payment timing.

Evaluate the remaining options: The third option suggests recognizing revenue and expenses at the end of the fiscal year, which ignores the accrual basis of accounting. The fourth option suggests cash basis accounting, which is not consistent with generally accepted accounting principles (GAAP).