A large auto manufacturer sells large fleets of vehicles to auto rental companies, such as Budget and Hertz. Suppose Budget is negotiating with the auto manufacturer to purchase 1,000 vehicles. Fill in the short paragraph to explain to the auto manufacturer when the company should, and should not, record this sales revenue and the related expense for cost of goods sold. Mention the accounting principles that provide the basis for your explanation. Let's decide how and when the manufacturer should recognize revenue. The manufacturer should record sales revenue when the revenue is earnedby delivering automobiles to the auto rental companies. The manufacturer should not record any revenue prior to delivery of the vehicles to the auto rental companies because it hasn't earned the revenue yet. The revenue principle governs this decision. Now let's decide how and when the manufacturer should record the cost of the sale. The manufacturer should record the cost of goods sold (after, at the same time, before) it records the revenue from the sale. The (revenue principle, expense recognition principle, historical cost principle, revenue principle) tells when to record expenses. Choose the answer choices in the parentheses

Auditing: A Risk Based-Approach (MindTap Course List)

11th Edition

ISBN:9781337619455

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter9: Auditing The Revenue Cycle.

Section: Chapter Questions

Problem 4CYBK

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A large auto manufacturer sells large fleets of vehicles to auto rental companies, such as Budget and Hertz. Suppose Budget is negotiating with the auto manufacturer to purchase 1,000 vehicles. Fill in the short paragraph to explain to the auto manufacturer when the company should, and should not, record this sales revenue and the related expense for cost of goods sold. Mention the accounting principles that provide the basis for your explanation.

Let's decide how and when the manufacturer should recognize revenue.

The manufacturer should record sales revenue when the revenue is

earnedby delivering automobiles to the auto rental companies. The manufacturer should not record any revenue prior to delivery of the vehicles to the auto rental companies because it hasn't

earned the revenue yet. The revenue principle governs this decision.

Now let's decide how and when the manufacturer should record the cost of the sale.

The manufacturer should record the cost of goods sold (after, at the same time, before) it records the revenue from the sale. The

(revenue principle, expense recognition principle, historical cost principle, revenue principle) tells when to record expenses.

Choose the answer choices in the parentheses

Expert Solution

Step 1

Cost of Goods Sold: The cost of goods sold are the direct expenses such as direct materials, direct labor, and other overheads incurred for producing the goods that are being sold. It does not include the selling and distribution expenses.

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