Customer prepays
A customer pays 72 upfront for twelve months of service. At receipt, before any service is delivered, what changes?
Worked answer
deferred Revenue: 72 = 72
revenue: 0 = 0
cfo: 72 = 72
Cash and the contract liability rise equally.
No service has been delivered, so no revenue is recognized yet.
Technical follow-ups
After three of the twelve months, how much revenue and liability remain if service is even?
Would faster annual prepayments improve reported profit immediately, or mainly cash and liabilities? Explain what service delivery changes.
Follow-up answer guide
After three months of even service, revenue is 18 and deferred revenue is 54 on the original 72 advance; recognizing it does not create new cash. Retry: 24 revenue and 72 deferred revenue.
A fresh retry
A customer pays 96 upfront for twelve months of evenly delivered service. At receipt, before any service is delivered, what are the effects on cash, deferred revenue, revenue and CFO?
Inspect replacement inputs
Check the retry bridge
deferred Revenue: 96 = 96
revenue: 0 = 0
cfo: 96 = 96
Original fictional example. Not a report of a specific firm’s interview. Explanations need qualified human review.