hard · Investment Banking accounting
A company reports $500 of deferred revenue collected in cash this year for services to be delivered next year, and separately accrues $300 of warranty expense (no cash paid yet). It has no other items. Net income shows the warranty expense but not the deferred revenue.
By how much does CFO exceed net income this period, and from which adjustments?
- CFO exceeds net income by $800: the $300 non-cash warranty accrual is added back, and the $500 increase in deferred revenue is a cash inflow not yet in income
- CFO exceeds net income by $500, because only the deferred-revenue cash collection is added, while the warranty accrual is treated as irrelevant to cash.
- CFO exceeds net income by $200, the net effect of the $500 deferred-revenue cash inflow less the $300 warranty accrual, which is incorrectly treated here as a use of cash.
- CFO equals net income because both the deferred revenue and the warranty accrual are treated as non-cash items that cancel out within the working-capital adjustments section.
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