Answer
First, the revenue recognition criteria hold that revenue can only be recognized when it is realized or realizable. We can’t recognize revenue before selling the inventory. Secondly, in line with the historical cost principle, liabilities and assets are recognized on the cost basis.
Work Step by Step
What the entry has done is recognize revenue before the sale of the inventory, which is in direct violation of the revenue recognition criteria. For instance, if we were to account for sales value, we would have a very difficult time trying to triangulate it without selling the item. Furthermore, this can also be erroneous because the future remains uncertain.
