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Quiz #1: Revenue Recognition and Accounts Receivable

Please refer to the attached Consolidated Statements of Income, Consolidated Balance Sheets,
and Notes to Consolidated Financial Statements from Yahoos 2006 Annual Report. Note
that Yahoo reports their 2006 financial numbers in the LAST column. You may remove the
attachments for your convenience. Show calculations for partial credit.
1.

a. As of December 31, 2006 what is the amount that customers owe Yahoo? (2
points)
A/R Gross = A/R Net + Ending Balance of Allowance for Doubtful Accounts
A/R Gross = 930,964 + 38,196 = 969,160
Therefore, customers owe $969,160 to Yahoo.
b. As of December 31, 2006 what is the amount that Yahoo does not expect to
collect from its customers? (2 points)
The ending balance in the Allowance for Doubtful Accounts, $38,196,
captures the amount Yahoo does not expect to collect form its customers as
of December 31, 2006.

2.

a. For fiscal 2006 what amount did Yahoo record as Provision for Bad Debts?
How, if at all, does this affect the income statement for 2006? (2 points)
Provision for Bad Debts for fiscal 2006 was $5,070 (from Schedule II). The
Provision for Bad Debts is an expense in the income statement and therefore
reduces reported income by $5,070 (ignoring taxes).

b. What is the amount of write-offs relating to receivables for 2006? How, if at


all, does this affect the income statement for 2006? (2 points)
The write-offs relating to receivables is $8,731 for 2006 (from Schedule II).
Write-offs do not affect the income statement.

3. a. As of December 31, 2006 what is the amount of deferred revenues? Why is it


reported as a liability? (2 points)
$317,982. This amount is reported as a liability because it represents
Yahoos goods and services that Yahoo has not yet delivered to its customers
but has received cash for.

b. What kind(s) of events and transactions could account for the changes in deferred
revenues? (2 points)
New deferrals that arise when customers pay cash to Yahoo for goods and
services to be delivered at a later point in time increase deferred revenues.
When Yahoo delivers these goods and services, the deferred revenues
decrease (they are converted to revenues on the income statement).
4. Suppose that Yahoo had always chosen full revenue recognition (i.e., recognized
100% of the revenues at the point of sale and did NOT defer any revenues)
i) How, if at all, would the balance sheet be different at the end of fiscal 2006?
(4 points) Be specific as to items and amounts. [You may assume that the
cost of services associated with the deferred revenues to be zero. Ignore
taxes]
Assets would be the same.
Liabilities would be lower by $317,982.
Equity (specifically, Retained Earnings) would be higher by $317,982,
ignoring taxes.
ii) How, if at all, would the income statement be different for fiscal 2006? Be
specific as to amounts (4points)
Revenues would be higher by $11,810 (= 317,982 306,172), the change
in the deferred revenue account. Net income would be higher by the
same amount, ignoring taxes.

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