Which of the following statements about revenues is correct?

• A. Revenues are recognized when they are earned, regardless of when cash is received.
• B. Revenues are recognized only when cash is received from customers.
• C. Revenues are recognized at the end of the fiscal year, regardless of when goods or services are delivered.
• D. Revenues are recognized when expenses are paid.

Answer: (A)

Verified step by step guidance

1. Understand the concept of revenue recognition: Revenue is recognized when it is earned, meaning when goods or services have been delivered to the customer, regardless of when cash is received. This is based on the accrual basis of accounting.
2. Eliminate incorrect options: Review each statement and identify why it does not align with the accrual basis of accounting. For example, 'Revenues are recognized only when cash is received from customers' is incorrect because it describes the cash basis of accounting, not the accrual basis.
3. Focus on the correct statement: The correct statement aligns with the accrual basis of accounting, which states that revenues are recognized when they are earned, not necessarily when cash is received.
4. Consider timing and fiscal year: The statement 'Revenues are recognized at the end of the fiscal year, regardless of when goods or services are delivered' is incorrect because revenue recognition depends on when the goods or services are delivered, not the fiscal year-end.
5. Analyze the relationship between revenues and expenses: The statement 'Revenues are recognized when expenses are paid' is incorrect because revenue recognition is independent of expense payment. Revenue is recognized based on earning activities, not expense transactions.