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 statement regarding the revenue recognition principle is true?

Revenue is recognized only when cash is received from customers.

Revenue is recognized when expenses are paid.

Revenue is recognized at the end of the fiscal year, regardless of when goods or services are delivered.

Revenue is recognized when it is earned, regardless of when cash is received.

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Verified step by step guidance

Understand the revenue recognition principle: This principle states that revenue should be recognized when it is earned, not necessarily when cash is received. This means that revenue is recorded when goods or services are delivered to the customer, and the company has fulfilled its performance obligations.

Analyze the incorrect options: The first option, 'Revenue is recognized only when cash is received from customers,' is incorrect because revenue recognition is not dependent on cash receipt but on earning the revenue. The second option, 'Revenue is recognized when expenses are paid,' is incorrect because revenue recognition is unrelated to expense payment. The third option, 'Revenue is recognized at the end of the fiscal year, regardless of when goods or services are delivered,' is incorrect because revenue must be recognized when earned, not based on the fiscal year-end.

Identify the correct statement: The correct statement is 'Revenue is recognized when it is earned, regardless of when cash is received.' This aligns with the revenue recognition principle, which emphasizes earning revenue as the key criterion for recognition.

Relate the principle to accounting standards: The revenue recognition principle is a fundamental concept in accrual accounting and is supported by accounting standards such as the Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). These standards ensure that financial statements accurately reflect the timing of revenue generation.

Apply the principle in practice: In real-world scenarios, companies often recognize revenue when they deliver goods or services, even if payment is received later. For example, if a company delivers a product to a customer in December but receives payment in January, the revenue is recognized in December because that is when it was earned.