Sales are recognized when a firm order is received from the customer, the sales price is fixed and determinable, and collectibility is reasonably assured.
Revenue should be recognized when earned and payment is assured. Since the company still has an obligation to deliver the goods, revenue is not yet earned. By recognizing revenue too soon,
| by recognizing revenue too soon | |||
| Net income | overstated | ||
| Ending inventory | understated | ||
| Inventory turnover | = Revenue / Inventory | = (overstated)/(understated) = overstated |
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