The Daily Technical #07

Good morning. Welcome to the seventh edition of The Daily Technical. You’re here for one reason so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
What is deferred revenue?

When explaining deferred revenue, start by defining it clearly—deferred revenue is a liability because it’s money received for services or goods not yet provided. It’s a promise that still needs to be fulfilled.

Some examples are gift cards, service agreements, or implied rights to future software upgrades associated with a product sold. In all these examples, the cash payment was received upfront and the benefit to the customer will be delivered on a later date.

Common Mistakes

1. Confusing Deferred Revenue with Earned Revenue: Many people assume all money received upfront is automatically counted as revenue. Make sure to stress that deferred revenue is not recognized as revenue until the company fulfills its part of the deal (e.g., providing a service or delivering future upgrades).

2. Ignoring the Liability Aspect: Some students forget that deferred revenue is a liability on the balance sheet. It’s not just about income but also about the company’s obligation to deliver a product or service later on.

3. Overlooking Partial Allocations: It’s easy to miss that only part of a sale might be deferred. For instance, think of a company that sells a smartphone for $500. $480 for the phone is immediate revenue, but the remaining $20 for future software updates is deferred.

Key Takeaways / TLDR

• Deferred revenue = a liability for cash received but services/goods not yet provided.

• Example: A portion of a smartphone sale might be deferred if it includes future upgrades.

TODAY’S QUESTION
Walk me through the cash flow statement.

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THAT’S A WRAP
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