Question

In a principal-agent relationship, which of the following typically characterize the agent, a.            Has inventory risk...

In a principal-agent relationship, which of the following typically characterize the agent,

a.            Has inventory risk

b.            Recognizes revenue on a net basis <--------------- answer

c.             Has discretion in establishing the price

d.            Has control of the goods or service to be provided

e.            Recognizes revenue on a gross basis

Can someone help me with this question please? I know the answer is b) but I want a good explanation of what it means to recognize revenue on a net basis? please help and thanks in advance!

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Answer #1

An agent is someone who sells goods on behalf of someone else known as principal.

The goods belongs to the principal as well as revenues generated from selling them. Agent works on a commission basis

Recognizing revenue on net basis means that the revenue of agent is not the entire proceeds from selling the goods but the commission that he earns

He has no inventory risk as it is borne by the principal

He has no discretion in setting price as it is also done by principal

has no control on goods

and does not recognize gross revenue i.e. entire proceeds

Please leave a comment if it is still not clear

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