Which of the following is a true statement about making promises to customers under the revenue recognition principle?

• A. Revenue is recognized when the contract with the customer is signed, regardless of delivery.
• B. Revenue is recognized when the promised goods or services are transferred to the customer.
• C. Revenue is recognized when production of goods is completed, even if not delivered.
• D. Revenue is recognized only when cash is received from the customer.

Answer: (B)

Verified step by step guidance

1. Understand the revenue recognition principle: This principle states that revenue should be recognized when it is earned and realizable, meaning when the promised goods or services are delivered to the customer, not necessarily when cash is received or when a contract is signed.
2. Analyze the first option: 'Revenue is recognized when the contract with the customer is signed, regardless of delivery.' This is incorrect because signing a contract does not mean the revenue has been earned yet. Delivery of goods or services is required for revenue recognition.
3. Analyze the second option: 'Revenue is recognized when the promised goods or services are transferred to the customer.' This aligns with the revenue recognition principle, as revenue is recognized when the performance obligation is satisfied by delivering goods or services.
4. Analyze the third option: 'Revenue is recognized when production of goods is completed, even if not delivered.' This is incorrect because revenue is not recognized until the goods or services are transferred to the customer, regardless of production completion.
5. Analyze the fourth option: 'Revenue is recognized only when cash is received from the customer.' This is incorrect because revenue can be recognized before cash is received, as long as the goods or services have been delivered and the performance obligation is satisfied.