Multiple Choice
When a company provides services on account, which of the following best describes the appropriate revenue recognition under accrual accounting?
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3. Accrual Accounting Concepts
Revenue Recognition and Expense Recognition
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Which type of companies recognize revenues when they sell inventory to customers?
A
Insurance companies
B
Holding companies
C
Merchandising companies
D
Service companies
Verified step by step guidance1
Understand the concept of revenue recognition: Revenue is recognized when it is earned and realizable, meaning the company has delivered goods or services and expects payment.
Identify the type of company in question: Merchandising companies are businesses that purchase goods to resell them to customers, such as retail stores or wholesalers.
Learn how merchandising companies recognize revenue: Merchandising companies recognize revenue at the point of sale, which occurs when inventory is sold to customers.
Contrast with other types of companies: Service companies recognize revenue when services are performed, while insurance companies recognize revenue based on premiums earned over time. Holding companies typically do not sell inventory and may recognize revenue from dividends or investments.
Conclude that merchandising companies are the correct answer because they recognize revenue specifically when inventory is sold to customers.
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