A subscription that costs $12 per year is delivered monthly. At the moment of sale (the beginning of the year), which of the following statements best describes the impact on the three financial statements?

A subscription that costs $12 per year is delivered monthly. At the moment of sale (the beginning of the year), which of the following statements best describes the impact on the three financial statements?

• A. Income statement: no change; Cash increases by 12; Unearned revenue increases by 12; Cash flow from operations increases by 12.
• B. Income statement: revenue recognized immediately; Cash increases by 12; Unearned revenue increases by 12; CFO increases by 12.
• C. Income statement: no change; Cash decreases by 12; Unearned revenue increases by 12; CFO decreases by 12.
• D. Income statement: revenue recognized immediately; Cash increases by 12; Unearned revenue decreases by 12; CFO increases by 12.

Answer: (A)

At the moment of sale, the business receives cash for a service that will be provided over time. So cash increases by 12 right away. However, because the service hasn’t been delivered yet, no revenue is earned this moment, so the income statement shows no change in revenue or profit. The obligation to provide future monthly service is recorded as a liability—unearned revenue—also increasing by 12. This reflects that the company still owes the service to the customer. Cash flow from operations rises by 12 because the cash received from the customer is an operating cash inflow. On the balance sheet, assets rise due to the cash, and liabilities rise due to the unearned revenue. The other options imply revenue is recognized immediately or misstate cash movements, which doesn’t align with delivering the service over the year.

At the moment of sale, the business receives cash for a service that will be provided over time. So cash increases by 12 right away. However, because the service hasn’t been delivered yet, no revenue is earned this moment, so the income statement shows no change in revenue or profit. The obligation to provide future monthly service is recorded as a liability—unearned revenue—also increasing by 12. This reflects that the company still owes the service to the customer.

Cash flow from operations rises by 12 because the cash received from the customer is an operating cash inflow. On the balance sheet, assets rise due to the cash, and liabilities rise due to the unearned revenue. The other options imply revenue is recognized immediately or misstate cash movements, which doesn’t align with delivering the service over the year.