To assess whether there are restricted funds, Deferred Revenue should be compared using which calculation?

To assess whether there are restricted funds, Deferred Revenue should be compared using which calculation?

• A. Deferred Revenue divided by Cash plus Savings
• B. Cash plus Savings divided by Deferred Revenue
• C. Net Income divided by Total Equity
• D. Revenue divided by Total Assets

Answer: (A)

Deferred Revenue is a liability for funds received but not yet earned, often reflecting restrictions on how those funds can be used. To see how much of the organization’s cash is already committed to those restrictions, compare Deferred Revenue to the most liquid resources: Cash plus Savings. The ratio Deferred Revenue ÷ (Cash + Savings) directly shows what portion of readily available cash is tied up in unearned/restricted obligations. A higher value means more restricted funds, while a lower value indicates greater liquidity for general use. Other options mix in profitability or asset measures that don’t reveal how much cash is already pledged to restricted activities, and taking a reciprocal would obscure the clear relationship between the liability and cash resources.

Deferred Revenue is a liability for funds received but not yet earned, often reflecting restrictions on how those funds can be used. To see how much of the organization’s cash is already committed to those restrictions, compare Deferred Revenue to the most liquid resources: Cash plus Savings. The ratio Deferred Revenue ÷ (Cash + Savings) directly shows what portion of readily available cash is tied up in unearned/restricted obligations. A higher value means more restricted funds, while a lower value indicates greater liquidity for general use. Other options mix in profitability or asset measures that don’t reveal how much cash is already pledged to restricted activities, and taking a reciprocal would obscure the clear relationship between the liability and cash resources.