hard · Investment Banking
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 back while the warranty accrual is irrelevant to cash
- CFO exceeds net income by $200, the net of the $500 deferred-revenue inflow less the $300 warranty accrual treated as a use of cash
- CFO equals net income because both the deferred revenue and the warranty accrual are non-cash and cancel within the working-capital section
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