Under percentage-of-completion, revenue can be recognized over time based on which criterion?

• A. The proportion of costs incurred to total estimated costs
• B. The amount billed to customers
• C. Cash collected to date
• D. The completion milestone achieved

Answer: (A)

Under percentage-of-completion, revenue is recognized as work progresses, based on the extent of completion. The standard measure is the costs incurred to date divided by the total estimated costs. This ratio shows how much of the contract has been completed and is used to recognize the corresponding portion of revenue. So, revenue recognized to date equals total expected revenue multiplied by that percentage, aligning revenue with the costs incurred to earn it. The amount billed to customers or cash collected to date does not determine revenue under this method, and waiting for a completion milestone would not capture ongoing progress as accurately as the cost-to-cost measure.