Under the cost recovery method, when are profits recognized?

Under the cost recovery method, profits are recognized only after all costs have been fully recovered. This method is primarily used in cases where the collection of cash flows is uncertain, such as in long-term contracts or specific types of receivables.

In this approach, any cash received is first applied to recover the costs incurred, meaning no profit is reported until the total costs initially incurred have been recouped. This aligns with the underlying principle of this method, which is to defer profit recognition until all expenses associated with the revenue-generation process are accounted for.

In contrast, the other options suggest profit recognition in various circumstances, like immediately upon contracts being signed or when sales exceed expenses, which do not accurately reflect the cost recovery method's guidelines and principles. This careful approach ensures that profits are not overstated when there may still be risks associated with future costs or revenue collections.