Chartered Financial Analyst Level 1

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Explanation:

When a company receives cash in advance for services to be delivered in a future period, it records a liability for unearned revenue at the time of receipt. This liability reflects the obligation to deliver the services in the future. Revenue is recognized only when the services are actually delivered, not when the cash is received. Therefore:

Option A (Net income for Year 1) is incorrect because no revenue is recognized in Year 1, as the services are delivered in Year 2.
Option B (Liabilities as of 31 December of Year 1) is correct because the unearned revenue is recorded as a liability until the services are provided.
Option C (Cash flow from operating activities for Year 2) is incorrect because the cash inflow is recorded in Year 1, not Year 2, even though the revenue is recognized in Year 2.

Explanation:

Option A (Net income for Year 1) is incorrect because no revenue is recognized in Year 1, as the services are delivered in Year 2.
Option B (Liabilities as of 31 December of Year 1) is correct because the unearned revenue is recorded as a liability until the services are provided.
Option C (Cash flow from operating activities for Year 2) is incorrect because the cash inflow is recorded in Year 1, not Year 2, even though the revenue is recognized in Year 2.

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For a company with a calendar year reporting period, receiving a payment in Year 1 for services to be delivered in Year 2 most likely increases:

Exam-Like

net income for Year 1.

7.1%

liabilities as of 31 December of Year 1.

78.6%

cash flow from operating activities for Year 2.

14.3%