Accounting & the three statements / ORIGINAL SCENARIO

Revenue that has not been collected

A software vendor records 48 of credit revenue. Associated cash operating costs are 18. Explain earnings and cash impact.

All amounts $m; no opening receivable, revenue not collected, costs paid, tax 25% paid currently. No other effects.

Try it before the answer →

Worked answer

net Income: (48 − 18) × (1 − 0.25) = 22.5
cfo: (48 − 18) × (1 − 0.25) − 48 = -25.5
ar: 48 = 48

Pre-tax profit is revenue less costs.

CFO subtracts the increase in receivables from net income.

Technical follow-ups

If the customer pays next period, does that create new revenue or reverse the receivable?

How could reported earnings grow while operating cash flow deteriorates? Name two facts you would investigate before judging the company.

Follow-up answer guide

Collection reduces accounts receivable and increases cash/CFO. It is not new revenue or net income when previously recognized correctly.

A fresh retry

A software vendor recognizes 60 of credit revenue and pays associated cash operating costs of 24. None of the revenue has been collected. At a 25% tax rate, calculate net income, CFO and the receivable created.

All amounts $m; no opening receivable, revenue not collected, costs paid, tax 25% paid currently. No other effects.

Inspect replacement inputs

revenue: 60
cost: 24
tax: 0.25

Check the retry bridge

net Income: (60 − 24) × (1 − 0.25) = 27
cfo: (60 − 24) × (1 − 0.25) − 60 = -33
ar: 60 = 60

Original fictional example. Not a report of a specific firm’s interview. Explanations need qualified human review.