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Technology Stocks : Wind River going up, up, up!
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To: Jerry Asher who wrote (4182)1/30/1999 6:01:00 PM
From: F. Foos  Read Replies (1) of 10309
 
WIND uses the accounting category "Deferred Revenue" to designate pre-paid revenue, that the company has received, but that is for services which will be rendered over a period of time.

For example, a customer may pre-pay for a two-year service contract. It would be misleading to book all of the pre-payment as revenue in the current quarterly income statement when services will be provided over a two year period. Under GAAP, the pre-payment is recorded on the balance sheet as "deferred revenue" in the current liabilities category. The term of the contract runs through 8 quarters in this example. For each of 8 quarterly periods, 1/8 of the pre-payment is reported as revenue on the income statement and the remaining unused balance is held as a current liability "deferred revenue", on the balance sheet.

If the customer paid $200 for a two-year service contract, each quarter the revenue would be reported on the income statement and balance sheet as follows:

--- Income -- Current Liability
Q - Revenue -- Deferred Revenue
Q1__ $25 __________ $175
Q2___ 25 ___________ 150
Q3___ 25 ___________ 125
Q4___ 25 ___________ 100
Q5___ 25 ____________ 75
Q6___ 25 ____________ 50
Q7___ 25 ____________ 25
Q8___ 25 _____________ 0

I hope that this clarifies the accounting rational behind "Deferred Revenue".

Frank
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