Under the Generally Accepted Accounting Principles (GAAP) framework, financial statements must adhere to specific accounting principles that guide how transactions and events are recognized, measured, and reported. One critical element of GAAP is related to the recognition and measurement of revenue. Consider the following scenarios: A company sells goods to a customer on credit and recognizes the revenue immediately. A company receives payment for its subscription service for the next year in advance and recognizes the entire amount as revenue. A company sells a product with a warranty and recognizes revenue only when the warranty period has expired. Which of the following statements about these scenarios is TRUE according to GAAP?

Exam

CFA Level 1

Section

Difficulty

Financial Reporting and Analysis

GAAP Revenue Recognition Principles

Hard Financial Reporting Standards Gaap Framework

Under the Generally Accepted Accounting Principles (GAAP) framework, financial statements must adhere to specific accounting principles that guide how transactions and events are recognized, measured, and reported. One critical element of GAAP is related to the recognition and measurement of revenue.

Consider the following scenarios:

A company sells goods to a customer on credit and recognizes the revenue immediately.
A company receives payment for its subscription service for the next year in advance and recognizes the entire amount as revenue.
A company sells a product with a warranty and recognizes revenue only when the warranty period has expired.

Which of the following statements about these scenarios is TRUE according to GAAP?

Revenue should be recognized when the goods are shipped, regardless of credit terms.

Revenue from subscription services should be recognized over the period the service is provided.

Revenue can be recognized at the point of sale, but not for warranty-covered products.

Hint

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