Textbook Problem

A friend of yours who is not an accounting major states, “I always thought that a company recognizes revenues at the time of sale. Recently, however, I heard chat there are five specific steps for revenue recognition and that included in the steps is something about performance obligations to customers (whatever that means). Does that mean companies only recognize revenue when they get paid? But then I also heard that revenue may be recognized before or after the sale. I am confused. Please explain revenue recognition to me.”

Required:

Prepare a written response for your friend and explain the revenue recognition criteria. Also include a discussion of the reasons for, and alternative methods of, recognizing revenue in a period other than the period of sale.