Auctioneer Practice Exam

Which of the following is true regarding the realization principle?

1. Revenue can only be recognized once a product is delivered

2. Revenue should be recognized even if cash is not received immediately

3. Revenue may be recognized before goods are shipped

4. Revenue recognition must occur at the end of each month

The correct answer is: Revenue should be recognized even if cash is not received immediately

The realization principle is a key accounting concept that dictates when revenue should be recognized in the financial statements. This principle indicates that revenue is recognized when it is earned, meaning that it is realized through the completion of a sale, regardless of whether cash has been received at that moment. Choosing the option that states revenue should be recognized even if cash is not received immediately aligns perfectly with this principle. Revenue can be recognized as soon as a product is delivered to the customer or a service has been performed, even if the customer has not yet paid. This allows businesses to reflect their earnings in the period they have been earned, providing a more accurate representation of financial performance. In contrast, the other choices either misinterpret the timing of revenue recognition or impose unnecessary constraints that don’t align with generally accepted accounting practices. For example, tying revenue recognition strictly to product delivery overlooks situations like credit sales. Similarly, suggesting that revenue recognition should occur at the end of each month does not reflect the event-driven nature of revenue recognition under the realization principle.