A customer provides a deposit of $500 000 near year-end. The product will not be delivered until next year. This transaction will:

Question

BlackTom AI · Accepted Answer

Reviewing the transaction: a customer deposits 500,000 near year-end, but the product isn’t delivered until next year. This creates cash (an asset) and a corresponding liability (unearned revenue) because the company has an obligation to deliver the product in the future.

Option A: 'increase net profit, total assets and cash.' The cash increases, but revenue is not earned until delivery, so net profit does not rise this year. Also, although total assets rise due to the cash, the accompanying liability means net assets (assets minus liabilities) don’t increase. This makes A incorrect.

Option B: 'increase cash but not increase net profit or total assets.' While it correctly notes cash increases and profit does not, it incorrectly asserts that total assets do not increase. In fact, total assets rise by the cash amount, even though a liability also increases. Thus B is inaccurate.

Option C: 'increase total assets and cash but not net profit.' This aligns with accounting treatment: cash (an asset) increases by 500,000, and total assets rise. However, since revenue is not earned until delivery, net profit does not increase in this period. The presence of a liability (unearned revenue) offsets the asset in terms of equity impact, but the statement about net profit is correct here. Therefore C is consistent with accrual accounting rules.

Option D: 'increase net profit and cash but not total assets.' Net profit would only increase when revenue is earned, which hasn’t occurred yet, so this option wrongly attributes profit to the current period. Also it claims no increase to total assets, which is false since cash has increased. Hence D is incorrect.

Dashboard Unit 4 Non assessable multiple choice quiz

A customer provides a deposit of $500 000 near year-end. The product will not be delivered until next year. This transaction will:

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