Identify the assumption, principle, or constraint that has been violated.?

Question

Church Company recognizes revenue at the end of the production cycle, but before sale. The price of the product, as well as the amount that can be sold, is not certain.

I think this violates the Revenue Recognition Principle but I do not quite understand the whole concept of the principle. Can someone please explain this to me? Thank you so much :)

Answer 1

revenue can not be recorded at the time production finishes.  When production finishes the finished goods remain on hand in inventory on the balance sheet until the sale takes place.

Revenue can not be recoginzed until the product is sold.  At that time the matching principle comes into place and requires that when the sale takes place, the cost of that product must be expensed.  Therefore, you would have a credit to sale, a debit to expense( both income statement items) and a credit to inventory, and a debit to cash or accounts receivable(both balance sheet items)

certainly, Church Co. can not recognize revenue,if they don't know the selling price and how much.... the matching principle has been violated.

hope this helps.

Answer 2

Revenue Recognition Principle is an accounting principle under generally accepted accounting principles (GAAP) that determines the specific conditions under which income becomes realized as revenue. Generally, revenue is recognized only when a specific critical event has occurred and the amount of revenue is measurable.

Investopedia Says:

For most businesses, income is recognized as revenue whenever the company delivers or performs its product or service and receives payment for it. However, there are several situations in which exceptions may apply. For example, if a company's business has a very high rate of product returns, revenue should only be recognized after the return period expires.

Companies can sometimes play around with revenue recognition to make their financial figures look better. For example, if XYZ Corp. wants to hide the fact that it is having a bad year in sales, it may choose to recognize income that has not yet been collected as revenue in order to boost its sales revenue for the year.

The most often used method of recognizing revenue is at the time of sale or rendering of service. The cash basis of revenue recognition is also popular among service businesses. Other methods of revenue recognition include during production and at the completion of production, one of these is a method called ' Completion of production basis'.

This method allows recognizing revenues even if no sale was made. This applies to agricultural products and minerals because (1) there is a ready market for these products with reasonably assured prices, (2) the units are interchangeable, and (3) selling and distributing does not involve significant costs. Not knowing what product the Church Company makes I don't know if this would apply to them or not but  I think The Full Disclosure Principle may has been violated.