As a general rule, revenue is normally recognized when it is ________.
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A. B. C. D.D
Revenue is generally recognized when it is realizable and earned.
The correct answer is C. measurable and earned.
Revenue recognition is an important principle in accounting that determines when and how revenue should be recognized in the financial statements. It is crucial for accurately reporting a company's financial performance. According to generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS), revenue is generally recognized when two criteria are met: it is measurable and earned.
Measurable: Revenue should be measurable, meaning that it can be reliably measured and quantified. This requires that the amount of revenue can be determined with reasonable accuracy. The measurement of revenue should consider the amount of consideration the company expects to receive in exchange for goods or services.
Earned: Revenue is considered earned when the company has substantially completed the earnings process or has fulfilled its obligations under the terms of a contract or agreement. This typically involves the delivery of goods or services to the customer. The company should have transferred control of the goods or services to the customer, and the customer should have the ability to use or benefit from them.
Option A, "realizable," refers to the collection of revenue, not its recognition. Realizable revenue is the amount that a company expects to collect from customers, often based on historical collection patterns and assessments of credit risk. It is not the primary criterion for recognizing revenue.
Option B, "measurable and received," is partially correct in highlighting the importance of measurability but overlooks the requirement of revenue being earned. Revenue recognition does not depend on actual receipt of cash or payment from customers. It focuses on the company fulfilling its obligations and earning revenue by providing goods or services.
Option D, "realizable and earned," combines the concept of revenue recognition with the subsequent collection of revenue. While realizable is an important aspect of revenue management, it is not directly related to revenue recognition. The key criteria for revenue recognition are measurability and earning the revenue.
In summary, revenue is recognized when it is measurable, meaning it can be reliably quantified, and earned, indicating that the company has fulfilled its obligations and completed the earnings process. Option C, "measurable and earned," accurately captures these criteria and is the correct answer.