Practice question · Multiple choice
A firm receives €12,000 for a year of service not yet delivered. Why is unearned revenue a liability when the cash has already arrived?
Hints
- Ask what the firm now owes, and to whom.
- The cash is one side of the entry. What is the other?
Show the answer
B. Because the obligation to deliver the service has been created
Why
Cash arriving creates an asset and an obligation at once. Recognising revenue immediately would report profit for work not yet done, which is exactly the manipulation the rule prevents.
Practise Liabilities and Equity
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More questions on Liabilities and Equity
- Current liability, non-current liability, or equity?
- Match each right-side item to its nature.
- Retained earnings sit at 4 million and the bank account holds 200,000. Where did the rest go?
- A firm has been profitable for years but has never paid a dividend. Where does all that profit sit?
- Which are advantages of debt financing over equity financing?
- Order the steps of issuing a corporate bond.
- A firm has total equity 300 and total liabilities 600. Estimate the debt-to-equity ratio.