Which statement describes premature revenue recognition?

Which statement describes premature revenue recognition?

• A. Recording expenses before cash is paid.
• B. Accurately matching revenue with expenses.
• C. Disclosing all liabilities.
• D. Recording revenue before it is earned to inflate earnings.

Answer: (D)

Premature revenue recognition means recording revenue before the goods or services are actually delivered and the earning process is complete. The revenue recognition principle requires that revenue is earned and realizable, with the performance obligation satisfied, risks and rewards transferred, and collectability reasonably assured. When revenue is recognized early, profits appear higher than they truly are, which can mislead investors and may lead to restatements or penalties for violating GAAP/IFRS. Other statements don’t describe premature revenue recognition: recording expenses before cash is paid relates to expense timing rather than when revenue is recognized; accurately matching revenue with expenses reflects proper accrual accounting; disclosing all liabilities concerns disclosures, not the timing of revenue recognition.

Premature revenue recognition means recording revenue before the goods or services are actually delivered and the earning process is complete. The revenue recognition principle requires that revenue is earned and realizable, with the performance obligation satisfied, risks and rewards transferred, and collectability reasonably assured. When revenue is recognized early, profits appear higher than they truly are, which can mislead investors and may lead to restatements or penalties for violating GAAP/IFRS.

Other statements don’t describe premature revenue recognition: recording expenses before cash is paid relates to expense timing rather than when revenue is recognized; accurately matching revenue with expenses reflects proper accrual accounting; disclosing all liabilities concerns disclosures, not the timing of revenue recognition.