What does GAAP state about revenue recognition?

• A. Revenue must be recognized only when cash is received
• B. Revenue can be recognized at any time
• C. Revenue should be recognized when earned, regardless of cash flow
• D. Revenue should be reported only at year-end

Answer: (C)

The principle of revenue recognition under Generally Accepted Accounting Principles (GAAP) emphasizes that revenue should be recognized when it is earned, which is typically when the goods are delivered or services are performed, irrespective of when the cash is actually received. This aligns with the accrual basis of accounting, which is fundamental to GAAP. This approach provides a clearer picture of a company's financial performance and allows users of financial statements to understand the company's revenues and expenses in relation to the period they occur, rather than their cash movements.

Recognizing revenue based on the actions that earn it rather than the timing of cash transactions ensures that financial reports accurately reflect a company's financial position, helping stakeholders make better-informed decisions. This principle also adheres to the matching concept, which states that revenues and their associated expenses should be recorded in the same accounting period, giving a more complete view of a company's operations.

The other options suggest methods of recognizing revenue that do not align with GAAP standards, which could lead to misleading financial statements and an inaccurate representation of a company’s financial health.