Which of the following is considered a relevant cash flow for revenue or expense recognition under accrual accounting?

• A. Cash paid for inventory that remains unsold at year-end
• B. Cash received in advance for goods to be delivered next year
• C. Cash borrowed from a bank to finance operations
• D. Cash received from customers for goods delivered during the current period

Answer: (D)

Verified step by step guidance

1. Understand the concept of accrual accounting: Accrual accounting recognizes revenues and expenses when they are earned or incurred, regardless of when cash is received or paid. This is different from cash accounting, which focuses solely on cash transactions.
2. Identify the relevant cash flow for revenue recognition: Under accrual accounting, revenue is recognized when goods or services are delivered, not necessarily when cash is received. Therefore, cash received from customers for goods delivered during the current period aligns with this principle.
3. Analyze the other options: Cash paid for inventory that remains unsold at year-end is not relevant for revenue recognition because the inventory has not been sold yet. Cash received in advance for goods to be delivered next year is deferred revenue and will be recognized in the future when the goods are delivered. Cash borrowed from a bank to finance operations is a financing activity and does not directly relate to revenue or expense recognition.
4. Focus on the timing of recognition: The key is to match revenues with the period in which the goods or services are provided. Cash received from customers for goods delivered during the current period matches this criterion, making it the relevant cash flow.
5. Conclude the reasoning: Based on the principles of accrual accounting, the correct answer is cash received from customers for goods delivered during the current period, as it reflects revenue earned in the current accounting period.