Question

How would an increase in $10 in deferred revenue affect all 3 financial statements?

How would a decrease in $10 affect the 3 financial statements?

Answer 1

a) Increase in $10 in deferred revenue:

i) Balance Sheet: Increase in $10 in deferred revenue would increase both assets and liabilities side of balance sheet by $10 since accounts receivables or cash account (asset accounts) will inrease by $10 and deferred revenue account (liability account) will increase by $10.

ii) Income Statement: Increase in $10 in deferred revenue will have no impact on the income statement since only balance sheet accounts are being credited and debited.

iii) Cash Flow Statement: Increase in $10 in deferred revenue would increase the cash flow from operating activities by $10 considering that deferred revenue has been recognized against a cash advance or deposit. However if deferred revenue has been recognized against accounts receivables account and no cash has actually been received, it will not have any impact on the cash flow.

b) Decrease in $10 in deferred revenue:

i) Balance Sheet: Decrease in $10 in deferred revenue would reduce liabilities side of balance sheet by $10 since deferred revenue account (liability account) will be debited by $10.

ii) Income Statement: Decrease in $10 in deferred revenue will increase the revenue and consequently profit on the income statement since income will be recognized on reduction of deferred revenue by debiting deferred revenue account and crediting revenue from operations account.

iii) Cash Flow Statement: Decrease in $10 in deferred revenue would be shown as a reduction in cash flow from operating activities under the head "Decrease in Other current liabilities". However it will also increase the net income at the top of the cash flows from operating activities.