Question

3. Operating cash flow is often referred to as the lifeblood of a firm. The vaccine makers received cash up-front from the government for the stockpiled vaccines. Such cash would be reported to stakeholders (financial analysts, stockholders, lenders, etc.) in the operating cash flow section of the Statement of Cash Flows in the fiscal period of receipt. Given this, why would these pharmaceutical companies be so concerned about when the revenue related to this cash is recognized for income statement purposes? In your response, consider how recognized revenues are used by firm stakeholders.

Answer 1

Answer:

Explanation:

Advanced cash payment is treated as liabilities in the financial statements until they are earned.

The accrual method of accounting states that income are recorded when they are earned and expenses recorded when incurred.

In furtherance to this , income are earned when the risks and rewards are transferred to the seller.

This means that until the revenue for this advanced payment is earned , it can not be recorded as a sales revenue in the books of the Vaccine makers , and the profit for the period will be affected , even though it was a boost to the cash flow.

B) Recognized revenue depicts the sales turnover of a company which in turn tells a stakeholder how well a business is doing ,even though it not a sole measure of performance. We need to know that most stake holders may not have a good understanding of other measures of financial performance , however , majority understand sales figure.

It gives the stake holder an insight to the profitability of the business in a period.