A decrease in unearned rev?

Does this represent low earnings quality? In the CFA mock it inferred that but I don’t understand why.

Any help?


Unearned revenue is a nice source of cash. If it’s growing, it means money is coming in before a good/service is being provided. For decreases, there would be an issue if management is prematurely moving money out of unearned revenue to regular revenue in violation of revenue recognition principles.

Thanks! So increases and decreases in unearned rev are both suspect then?

I would say that an increase in UR is not a cause for suspicion. It increases cash and is far more conservative than trying to immediately recognize revenue.

For a decrease in UR, one has to be more careful. Of course, UR would be moved into regular revenue as the organization provides the contracted service/good. Where the shenanigans comes into play is if these amounts are moved to regular revenue, but where the conditions for full revenue recognition have been not been met.