Hey guys,
Quick question I've been struggling with in regards to unearned revenue. Very simple example:
Newspaper company sells 1 year sub for 1200 (100/month)
Cash +1200
Unearned Rev +1200
Now, at the end of 1Q:
I/S;
Revenue +300
B/S;
Cash same = 1200
Unearned Rev -300 --> 900
Retained earnings-->SH equity +300 -->300
Assets (1200) = L (900)+ SE (300)
My concern is that when adjusting liabilities for when the revenue is actually earned and reported on I/S, how do you adjust the Cash? As the "earned revenue" flows through the I/S, it will no doubt be subjected to opex and tax expenses which will reduce bottom line net income (and therein, retained earnings-->SH equity).
So e.g.
I/S;
Revenue +300
Net income ~175
B/S;
Cash ?
Unearned revenue -300 =900
SH equity +175
Assets (1200) =/= L(900)+SE(175)
How do you balance?
Hopefully this makes sense to someone.
Thanks for any help!
Won't cash fall in that case by however much taxes are? Assuming that's the reason why bottom line NI fell.
My guess is you would make a taxes payable for the taxes that you owe. When you pay the tax, you remove the payable and reduce cash, thus making it balance.
oh geez just build a cashflow statement. net income -decrease in unearned revenue
so cash goes down...
Never mind. Feel like an idiot now.
Unearned revenue creates a temporary difference between pre-tax and taxable income. This results in the creation of a DTA since you are required to pay taxes on the $1200 right now before you start recognizing it on your I/S. Assuming no other temporary differences and a 40% tax rate, you would have a DTA of $480. This will be in your current assets and depleted every quarter as unearned revenue is converted to revenue on the I/S. Let me know if you need a more complete explanation of how the numbers flow through the statements quarter to quarter.
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