Revenue Recognition Methods

B

IV refers to a method under which costs in drilling oil wells can be capitalized and is not a revenue recognition method.

The correct answer is B. I & II.

Revenue recognition refers to the process of recognizing revenue in a company's financial statements. It determines when and how revenue should be recognized, based on the completion of specific criteria. Let's go through each option and explain whether it is a revenue recognition method or not:

I. Cost Recovery Method: The cost recovery method is not a revenue recognition method. Under this method, revenue is recognized only after the total costs incurred in a project or contract are recovered. Until that point, revenue is not recognized. It is typically used in long-term construction contracts or projects where recovery of costs is uncertain.

II. Installment Method: The installment method is a revenue recognition method. It is used when a company sells a product or provides a service and receives payment in installments over an extended period of time. Under this method, revenue is recognized proportionately as cash is collected from the customer. The percentage of revenue recognized in each period is based on the ratio of cash collected to the total expected cash collections.

III. Sales Cost Method: The sales cost method is not a recognized revenue recognition method. It does not align with any standard revenue recognition principle. It is possible that this option is a distractor or a term that does not exist in the context of revenue recognition.

IV. Successful Efforts Method: The successful efforts method is not a revenue recognition method. It is an accounting method used in the extractive industries, such as oil and gas. This method allows companies to capitalize only the costs directly associated with successful exploration and development activities. Revenue recognition in these industries typically follows other specific guidelines.

In summary, the revenue recognition methods among the given options are the Installment Method (II) and the Cost Recovery Method (I), making the correct answer B.