What is deferred revenue? What is the link between realized revenue and deferred

Question

What is deferred revenue? What is the link between realized revenue and deferred revenue? Give numerical examples to illustrate your points.

How do foreign currency exchange rates affect revenue? Give numerical examples to prove your points.

Most of the receivables are expected to be received in sometime later dates. Then, what is the problem a company may encounter if it cannot collect the money from the receivable? What measures does a firm can take to reduce possible losses?

What are the most common operating expenses? Show your understanding why they are important for the company’s operations and performance.

Explanation / Answer

1. Deferred revenue is basically the money which a company has already received but have not delivered the services yet. For example: If you take a monthly subscription of a newpaper services or a magazine, the firm will take money upfront and will provide the service later on during the month. This is deferred revenue.

Realized revenue is which a company has already realized the revenue and provided the services already.

For example : Lets assume you but a yearly subscription of a magazine and pay $120 ($10 monthly) this will become deferred revenue for the magazine company. After a month of service, the $10 revenue will become the realized revenue and $110 will be new deferred revenue.

2. Companies who has operations in country other than its local country, company will get revenue from that country and it will be in foreign currency. Now company will have to exchange that amount to covert it into local currency. In that case, they face foreign exchange risk.

For example: Suppose we have a firm in India and we have operations in US. We have already provided the services and expecting $1000 payment from the client in next 3 months. Current exchange rate is INR 62 / $. So total payment expectation is INR 62000. But after 3 months say the rate become INR 60 / $, the payment will reduce to INR 60000. This is the foreign currency exchange risk.

3. We can reduce losses from accounts receivables by taking following measure:

a) reduce the number of account receivable days.

b) Allow receivables for credit worthy customers / suppliers

c) Give incentive to customers / suppliers so that they get some benefit when they pay back

4. Most common operating expenses are:

Rent,

Payroll,

Office supplies

Marketing expenses etc

These are important because :

Companies need to pay the rent for the office space and this is part of daily operations

Every company has employees which they need to pay and they are important part of the operations

Companies need to pay for the office supplies like stationary, groceries, bathroom accesories etc

Without Marketing, it will be difficult to companies to achieve larger customer base

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