Amounts received in advance from customers for future products or services: Multiple Choice O о O O Increase income. Are revenues. Require an outlay of cash in the future. Are liabilities. Are not allowed under generally accepted accounting principles (GAAP). O @ E ă 8 VE
Amounts received in advance from customers for future products or services: Multiple Choice O о O O Increase income. Are revenues. Require an outlay of cash in the future. Are liabilities. Are not allowed under generally accepted accounting principles (GAAP). O @ E ă 8 VE
Auditing: A Risk Based-Approach to Conducting a Quality Audit
10th Edition
ISBN:9781305080577
Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Chapter14: Activities Required In Completing A Quality Audit
Section: Chapter Questions
Problem 65RSCQ
Related questions
Question
Question 12
![### Understanding Customer Prepayments
When customers make payments in advance for products or services, it is important to understand how these amounts are recorded in financial statements. Here's a multiple-choice question that can help clarify the accounting treatment of such prepayments:
---
**Question:**
Amounts received in advance from customers for future products or services:
**Multiple Choice**
- [ ] Increase income.
- [ ] Are revenues.
- [ ] Require an outlay of cash in the future.
- [x] Are liabilities.
- [ ] Are not allowed under generally accepted accounting principles (GAAP).
---
**Explanation:**
Amounts received in advance from customers, also known as "unearned revenue" or "deferred revenue," are recorded as liabilities on the balance sheet. This is because the company has an obligation to deliver a product or perform a service in the future.
#### Key Points:
- **Not Income**: These amounts do not immediately increase income since the revenue recognition principle requires that revenue is only recognized when the service is rendered or the product is delivered.
- **Not Immediate Revenue**: Similarly, these prepayments are not recorded as revenue until the earnings process is complete.
- **Future Obligation**: These prepayments imply an obligation to deliver products or services in the future.
- **Compulsory under GAAP**: Recognizing such amounts as liabilities is in accordance with generally accepted accounting principles (GAAP).
By marking these prepayments as liabilities, companies ensure accurate financial reporting and compliance with accounting standards.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F950ccb0b-88f0-424e-a789-46ed3bd2a086%2Fefc3029a-23fb-4d66-9546-b5bac7a1cd86%2Fvnf3sbv_processed.jpeg&w=3840&q=75)
Transcribed Image Text:### Understanding Customer Prepayments
When customers make payments in advance for products or services, it is important to understand how these amounts are recorded in financial statements. Here's a multiple-choice question that can help clarify the accounting treatment of such prepayments:
---
**Question:**
Amounts received in advance from customers for future products or services:
**Multiple Choice**
- [ ] Increase income.
- [ ] Are revenues.
- [ ] Require an outlay of cash in the future.
- [x] Are liabilities.
- [ ] Are not allowed under generally accepted accounting principles (GAAP).
---
**Explanation:**
Amounts received in advance from customers, also known as "unearned revenue" or "deferred revenue," are recorded as liabilities on the balance sheet. This is because the company has an obligation to deliver a product or perform a service in the future.
#### Key Points:
- **Not Income**: These amounts do not immediately increase income since the revenue recognition principle requires that revenue is only recognized when the service is rendered or the product is delivered.
- **Not Immediate Revenue**: Similarly, these prepayments are not recorded as revenue until the earnings process is complete.
- **Future Obligation**: These prepayments imply an obligation to deliver products or services in the future.
- **Compulsory under GAAP**: Recognizing such amounts as liabilities is in accordance with generally accepted accounting principles (GAAP).
By marking these prepayments as liabilities, companies ensure accurate financial reporting and compliance with accounting standards.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
Auditing: A Risk Based-Approach to Conducting a Q…
Accounting
ISBN:
9781305080577
Author:
Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Publisher:
South-Western College Pub
Principles of Accounting Volume 1
Accounting
ISBN:
9781947172685
Author:
OpenStax
Publisher:
OpenStax College
Auditing: A Risk Based-Approach to Conducting a Q…
Accounting
ISBN:
9781305080577
Author:
Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Publisher:
South-Western College Pub
Principles of Accounting Volume 1
Accounting
ISBN:
9781947172685
Author:
OpenStax
Publisher:
OpenStax College
Auditing: A Risk Based-Approach (MindTap Course L…
Accounting
ISBN:
9781337619455
Author:
Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Publisher:
Cengage Learning
Business/Professional Ethics Directors/Executives…
Accounting
ISBN:
9781337485913
Author:
BROOKS
Publisher:
Cengage
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College