USA Unearned Revenue Included In Net Income

[YelloJacket]

I was looking into this reconciliation of net income to cash flow from operations. The "Unearned Revenue" gets subtracted from net income to arrive at operating cash flows. This means that it was originally included in net income. Why? I thought GAAP Accrual earnings mean that unearned revenues are never matched and included for computing net income until the critical event of service rendered is met.


Below if you see the last but one item, Unearned Revenue of (1555) is being subtracted from net income.

 

[Kat Maple]

Hi Yellojacket

You said the unearned revenue was originally included in net income. But look more closely at the statement. The item "unearned revenue" is listed with "Changes in assets and liabilities". So it was not included in net income. It was a change in a liability account between year ends that did not use or add cash.

Hope that clarifies things

Kat

 

[YelloJacket]

Thanks @Kat Maple It just seems like a strange reconciliation. I mean why would they put in un-earned receivables and cancel the unearned revenue (that forms a part of it)? Id have expected a much more straighforward reconciliation from net income to operating cash.

 

[Kat Maple]

Hi Yellojacket

Here is an example:
Your net income is zero
You receive $50,000 in cash that is for a project yet to start. So it is recorded in Unearned revenue acct as a liability
DR cash
CR Unearned Revenue Liability


Your cash flow statement looks like this
Net income $0
Adjustments (etc)
Unearned revenue 50,000
Net cash provided by operating activities; $50,000

So the unearned revenue was never a component of net income.
I think it might be clearer (but wordier) if the "Adjustments" line item of the Cash Flow said
"We took net income and adjusted it by all sorts of stuff - mostly using balance sheet accounts not used in the Financing or Investing sections to get to a strange number"

Best regards

Kat

 

[YelloJacket]

Thanks @Kat Maple. Your example makes perfect sense To me. In my screenshot however, if you observe the unearned revenue is subtracted, notice the brackets (). That is the source of confusion.

 

[Kat Maple]

OK, so there was a decrease in the Unearned Revenue Liability account. Can happen if a) some of the Unearned Income was recognized into Income. If so then Income was affected. or b) some of the Unearned Income account was refunded to a customer. If so then income was not affected.

Best Regards

Kat

 

[YelloJacket]

@Kat Maple Yah that looks like it. Some of the unearned income was recognized into revenue, but without cash receipt (hence the subtraction in cash flows). But then again why would a large accelerated filer recognize unearned revenue in GAAP net income? That beats me. Oh well!

 

[Kat Maple]

You would recognize unearned revenue into GAAP net income when you have earned that income

Kat

 

[YelloJacket]

I see ok - so it is a situation of unearned revenue becoming earned, but without corresponding cash receipt for the year.

 

[Kat Maple]

Yes!