Which of the following statements best describes the effects of recognizing revenue earned by a business entity?
A)Assets increase only when cash sales are collected.
B)Stockholders' equity increases only when credit sales are made.
C)Assets and stockholders' equity increase when either cash or credit sales are made.
D)Assets increase and stockholders' equity decreases when either cash or credit sales are made.

Question

Quizplus · Accepted Answer

Recognizing revenue earned by a business entity results in an increase in assets and stockholders' equity regardless of whether the sales were made in cash or credit. This is because revenue represents an increase in the company's overall value, which is reflected in both the balance sheet (assets) and the income statement (stockholders' equity). Option A is incorrect because assets can increase even if cash sales are not immediately collected (e.g. if the company bills customers and collects payment later). Option B is incorrect because stockholders' equity can also increase if cash sales are made (e.g. if the company earns a profit from cash sales and decides to distribute dividends or retain earnings). Option D is incorrect because revenue recognition typically has a positive effect on both assets and stockholders' equity.

Which of the Following Statements Best Describes the Effects of Recognizing