U4, AOS 1 - Unearned Revenue Flashcards
What is the definition of unearned revenue?
Unearned revenue is money received by a business for services or products that have not yet been delivered or performed.
True or False: Unearned revenue is recorded as a liability on the balance sheet.
True
Fill in the blank: Unearned revenue is also known as ______ revenue.
deferred
What is the primary purpose of recognizing unearned revenue?
To accurately reflect the business’s financial position and obligations.
Which of the following is an example of unearned revenue? A) Cash sales B) Subscription fees received in advance C) Accounts receivable
B) Subscription fees received in advance
True or False: A company can recognize unearned revenue as income immediately upon receipt.
False
What happens to unearned revenue when the service is performed?
It is recognized as earned revenue and moved from the liability account to the income statement.
Multiple choice: Which account is increased when unearned revenue is recognized? A) Cash B) Revenue C) Unearned Revenue
B) Revenue
True or False: Unearned revenue can only come from cash transactions.
False
What are the two main accounting principles that govern the recognition of unearned revenue?
The revenue recognition principle and the matching principle.
Fill in the blank: Companies often receive unearned revenue from ______ contracts.
long-term
What is the typical journal entry when unearned revenue is first recorded?
Debit Cash and Credit Unearned Revenue.
True or False: Unearned revenue is not reported on the income statement until the service is provided.
True
Short answer: Name one industry where unearned revenue is commonly found.
Subscription services or insurance.
What is the effect of unearned revenue on a company’s cash flow?
It increases cash flow when the payment is received.
True or False: Unearned revenue can be considered a form of financing.
True
Fill in the blank: When a company receives payment for future services, it creates an obligation to ______.
perform those services
What is the accounting treatment for unearned revenue at the end of an accounting period?
It remains on the balance sheet until the revenue is earned.
Multiple choice: Which of the following does NOT typically involve unearned revenue? A) Prepaid insurance B) Consulting fees for future services C) Sale of inventory
C) Sale of inventory
