Technical question - if accrued compensation increases by $10, but is not being recognized as an expense and IS just changing from non-accrued to accrued revenue, how does this impact the 3 statements

Based on the most helpful WSO content, here's how an increase in accrued compensation by $10, without being recognized as an expense, impacts the three financial statements:

Income Statement (I/S)

• No impact: Since the accrued compensation is not being recognized as an expense, there is no change to the income statement.

Cash Flow Statement (CFS)

• Cash Flow from Operations (CFO): The increase in accrued compensation, which is a current liability, will increase the CFO by $10. This is because an increase in current liabilities is considered a source of cash.

Balance Sheet (B/S)

• Liabilities: Accrued compensation, a current liability, increases by $10.
• Assets: Since there is no cash outflow or expense recognition, there is no immediate impact on the assets side.
• Equity: No impact on equity as there is no change in net income or retained earnings.

Balancing the Balance Sheet

• Assets: No change.
• Liabilities: Increase by $10 due to the accrued compensation.
• Equity: No change.

The balance sheet balances because the increase in liabilities is offset by the increase in cash flow from operations, which does not immediately affect the assets or equity.

Summary

• Income Statement: No change.
• Cash Flow Statement: CFO increases by $10.
• Balance Sheet: Liabilities increase by $10, no change in assets or equity.

This ensures that the balance sheet remains balanced with the increase in liabilities being offset by the increase in cash flow from operations.

Sources: Accounting question on Deferred Revenue, Beyond the guide: a list of real interview technical questions, https://www.wallstreetoasis.com/forum/investment-banking/advance-payments-and-valuation-of-a-firm?customgpt=1, Investment Banking Interview Questions - 15 Answers to Land the Job, Today's Investment Banking Interview Question?