Reported sales $180k account receivable increased $24K unearned revenue decreased $4K Cash collected from sales: A) $152k B) $156k C) $160k the answer is A but I don’t quite get why you subtract the $4K? I would have thought you would add it to reported sales? Can someone please explain…
because unearned revenue is cash received in a prior period without fulfilling the sale. So if it decreases, you’re not collecting new cash, but you are basically fulfilling an order making it a cash outflow.
It’s the concept of matching principal. Unearned revenue is the revenue booked beforehand, before fullfilling the sale/service obligation in-full. So an increase in Unearned Revenue means - you booked revenue for the transaction which you have not yet earned (as per matching principal) and likewise decrease in Unearned revenue means - you performed the services which were due and reduced the unearned amount. Hence, 180K - 24K - 4K
hey, thanks for that but I get that you are just completing the service/sale but I don’t get how that reduces current period cash collection. Let’s take a basic example a magazine subcription. So on inception you increase cash, and you increase unearned revenue. Once the magazine is delivered you would recognise the revenue and decrease unearned revenue. Where would that process decrease current period cash collections?
My thinking was that it was B.
account receivable increased $24K: revenue is earned (you have the right to report it in Sales), most likely collectible too, but you did not received the cash yet. Cash doesn’t change hands. unearned revenue decreased $4K: in the previous reporting period you have concluded contracts for magazine delivery, full amount of the subscription for an entire year has been paid in advance. In that previous period you booked the cash received, and built a liability (unearned revenue) for the amount that you did not earned (since you did not deliver the paper yet). But all cash is already on your BS. Now, one period later, you delivered magazines in an amount equal to $4K. You earned it, and have to right to report it in Sales, but again no cash changes hands, the booked cash from previous period decreases by $4K, and the liability (unearned revenue) decreases by $4K. What is the actual cash changing hands then, out of the entire Sales revenue? 180-24-4=152
you’re right, but it’s a little unintuitive and you need to think about it a little to get it. If you collected $100k in cash last year in November, and we are now in February, then your 2008 BS cash balance would show this $100k, I assume. Would your sales for 2008 show $100k as well? If so, then in your next quarterly statement (Q1 2009), what would your sales and BS cash accounts show if you delivered all the $100k service? …I’m just ramping up right now, I haven’t yet gotten into this stuff.
Map1 perfect explanation. Thanks for taking the time to explain it, I get it now. Appreciate it.
Sales of 2008 will reflect the entire $100K only if the amount is entirely earned (you delivered the goods, services, whatever you’re selling). Sales is an IS item, cash is a BS item. Sales will include all cash in, if, and only if, that cash is earned. If it is not, your cash will still show the entire amount, but the BS will also include the liability, unearned revenue, in amount equal to what has not yet been earned as of December 2008, and Sales will include only Cash in - unearned revenue. What is on your statements at the end of Q1 2009 pertain to what was the activity in that quarter (probably cash will go down if, or when, you buy raw materials), your liability for unearned revenue will go down as you deliver services/goods, and Sales will include the equivalent of those goods/services delivered during that quarter.
Today I’m starting FR&A, so I’m sure there wll be more of this stuff right around the corner.