Accrual Accounting: Revenues and Costs

D

III is not necessarily true. It is used only by a few specific firms under a method called "Percentage completion of contract."

Under accrual accounting, revenues and expenses are recognized when they are earned or incurred, regardless of the timing of cash inflows or outflows. Let's go through each statement to determine which ones are true.

I. Revenues are recognized when goods are delivered. This statement is true. Under accrual accounting, revenues are recognized when goods are delivered or services are performed, not when cash is received. This principle is known as the revenue recognition principle.

II. Revenues are recognized when cash is received. This statement is false. As mentioned earlier, under accrual accounting, revenues are recognized when goods are delivered or services are performed, not when cash is received. The timing of cash receipt may not necessarily align with when the revenue is earned.

III. Revenues are recognized in proportion to expenditures incurred. This statement is false. The recognition of revenues is not directly related to the expenditures incurred. Revenue recognition is based on the delivery of goods or services, while expenditures are recognized as expenses when they are incurred, regardless of the timing of revenue recognition.

IV. Revenues are matched with the associated costs. This statement is true. Accrual accounting follows the matching principle, which states that revenues should be matched with the expenses incurred to generate those revenues. This ensures that the financial statements reflect the economic reality of a period by showing the expenses directly related to generating the revenues.

Based on the analysis above, the correct answer is D. I & IV. Revenues are recognized when goods are delivered (statement I) and revenues are matched with the associated costs (statement IV) under accrual accounting.