Deferred revenue decreases by 10, 3 statements?

Deferred revenue decreases by 10
how does it change the 3 statements?

my understanding: (assuming 40% tax rate)
I/S: revenue+10, taxes +4, NI+ 6
B/S: COGS-10, unearned revenue-10
no change to CFS (but NI+6...how to offset?)
I am not sure. Can anyone help? Thanks a lot!

Comments (24)

Nov 1, 2017

COGS would not be the same value as revenue since one is a cost and one is a revenue number. You also have to book a decrease in inventory. You also don't offset net income (not sure why you think you would ever do this). You are recognizing a revenue number that was delayed until now so of course your NI would be higher. Essentially deferred revenue (b/s liability) was turned into a revenue (i/s credit).

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Nov 1, 2017

Thank you so much for your reply!!!
So, for B/S, inventory-4, shareholders' equity+6, Unearned revenue-10?

Nov 1, 2017

If that is what your cost number is. Think of it like a journal entry. If the cost is 4 then you would debit COGS and then credit inventory for the same amount.

Nov 1, 2017

IS: Rev +10, Taxes +4, NI+6

B/S: Current Liabilities (10), Retained Earnings +6

CFS: Cash Provided by Operating Activities (10)

I come from down in the Valley, where Mr. when you're young, they bring you up to do like your daddy done.

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Mar 12, 2019

@BBA18 your balance sheet doesn't balance so that's wrong see @Draymond23 for the correct answer

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Nov 1, 2017

Extra credit for mentioning DTAs

I/S:
+6 (net of -4 tax when you recognize the deferred revenue of 10)

CFS:
-10 since revenue is non-cash
+4 for DTA reduction (you'd already paid cash taxes on the deferred revenue. IRS uses cash accounting but GAAP uses accrual)

so 0 net change in cash

B/S
Assets
-4 DTA

Liabilities
-10 deferred revenue
Equity
+6 retained earnings

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Nov 1, 2017

Oh thank you so much for your reply!!!

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Nov 2, 2017

Not accounting for DTA's, this is the way you answer this question.

10 deferred revenue decrease.

IS: Rev +10 (1-T) - NI +6
CFS: NI +6, decrease in deferred rev (use of funds) -10. Overall change - +4
BS: Assets: Cash +4. Liabilities: Decrease in def rev 10, increase in NI 6

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Nov 1, 2017

Thanks for your reply!
But I think no change to the CFS. taxes payable increase by 4, so you need to adjust CFO by adding 4?

Apr 18, 2018

Thanks for the insight.

I agree with Daveo - since NI goes up by 6 and is impacted by a non-cash expense, we should adjust it in the CFS to get the net change in cash we use in the BS.

When answering this in an interview, do we want to talk about the decrease in inventory or increase in COGS that's associated with providing a good or service?

Best Response
Apr 21, 2018

Sorry for bumping this but isn't this incorrect? (Need to make sure I'm not going crazy)
I thought it was this way.

IS: Revenue +10(1-T), NI +6
CFS: NI +6 Deferred Rev -10 so overall change -4
BS: Cash -4, Liabilities -10 NI +6 and that ties -4, = -4.

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Oct 10, 2018

This should be the correct one...you are realizing a revenue here but it's non-cash so you subtract that when you calculate net change in cash. So you end up with -4.

Apr 17, 2019

What if deferred revenue increases by ten? You wouldn't log a ten decrease of revenue, right? Just deferred revenue up 10 and cash up 10?

This is a time sensitive question if anyone happens to know the answer

Nov 2, 2017

You have paid it and accounted for it in the net income already? Then the net income (tax adjusted) goes to the CFS.

Nov 1, 2017

oh right! I think you are right!!

Apr 21, 2018

This is the way I thought about doing it:

IS: Revenue +10(1-T), NI +6
CFS: NI +6 Deferred Rev -10 so overall change -4
BS: Cash -4, Liabilities -10 NI +6 and that ties -4, = -4

Just a question, how do you account for the decrease in inventory? Assume COGS is equal to $5, on the BS it would be -$5 Inventory, how do you balance that on the liabilities side?

Oct 10, 2018

Assuming $5 decrease in Inventory (Increase in COGS), there should be nothing impacting Liabilities.

IS: Rev -5, NI: -3

CF: NI -3, Inv. +5, ---- Change in Cash +2

BS: A [Cash +2, Inventory -5 = -3], E [Retained Earnings -3]

Oct 10, 2018

IS: Rev +10, NI +6 --- assuming 40% tax rate

CF: NI +6, Deferred Rev -10, ---- Change in Cash -4

BS: A [Cash -4], L+E [Deferred Revenue -10, Retained E +6 = -4]

Mar 12, 2019
TripleARated:

IS: Rev +10, NI +6 --- assuming 40% tax rate

CF: NI +6, Deferred Rev -10, ---- Change in Cash -4

BS: A [Cash -4], L+E [Deferred Revenue -10, Retained E +6 = -4]

why is there a decrease in liability of -10? shouldnt it 10 and then once you receive the cash you add cash and decrease the L? in this case of deferred revenue couldn't you do: A(-4 cash +10 acc.receivables), L=0 and E= 6?

regards

Mar 12, 2019
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