ACC 1010 Module 6 Revenue and Cash Flows Homework Example

Delaware River Music, Inc.: Recognizing Bundled Revenue and Explaining Cash for the Period Ended December 31, 2026

Student Name

Bachelor of Science in Business Administration, Thomas Edison State University

ACC-1010: Principles of Financial Accounting

Mentor Name

Month Day, Year

Delaware River Music, Inc.: Recognizing Bundled Revenue and Explaining Cash for the Period Ended December 31, 2026

Delaware River Music, Inc., the music shop invented for this run of ACC-1010 homework samples, closed its first reporting period on December 31, 2026. This final homework addresses two questions the store's bookkeeper raised at year end: how to record revenue from the back-to-school bundles and gift cards the store began selling in the fall, and how to explain to the bank why the store's cash grew by far more than its net income. Part A applies the five-step revenue recognition model; Part B builds the cash flow statement, starting from net income.

Part A: The Back-to-School Bundle

From August, the store sold a starter package for $630: a student violin outfit, ten weekly private lessons and a one-year maintenance plan covering string changes and adjustments. Sold separately, the three items are priced at $289, $350 and $60. Current standards set out a five-step model for this situation (Financial Accounting Standards Board [FASB], 2014). Applied to this bundle, the contract is the signed starter agreement; it holds three separate promises, because a family could buy any one of them alone; the price to be shared out is $630; the $630 is divided according to what each promise sells for by itself; and each share becomes revenue only when the store delivers that promise.

Because the bundle is priced $69 below the separate prices, the discount is spread across all three obligations rather than assigned to one. For a customer who bought a bundle on September 1, by December 31 the store has delivered the violin, taught all ten lessons and provided four months of maintenance. It recognizes $260.47 plus $315.45 plus $18.03 (four-twelfths of $54.08), or $593.95, in 2026 and holds $36.05 as unearned revenue, a liability, until the remaining eight months of maintenance are provided. The store sold 84 bundles between August and October; its revenue schedule applies the same calculation to each according to its sale date.

Gift cards follow the same logic. In December the store sold $2,400 of gift cards, of which $650 had been redeemed by December 31. Revenue of $650 is recognized for the goods and lessons provided, and $1,750 remains as unearned revenue, because the store still owes customers merchandise or lessons. Until the store has enough history to estimate how much will never be redeemed, it will not recognize any revenue from unused balances.

Part B: Statement of Cash Flows, Indirect Method

Under the indirect approach, the statement begins from net income, removes the effect of noncash charges and then corrects for movements in current assets and current liabilities.

Several adjustments deserve a sentence each. Depreciation is added back because it reduced net income without using cash. Increases in receivables, inventory and prepaid insurance are subtracted because cash went into them or was not yet collected. Increases in payables, accrued liabilities and unearned revenue are added, because the store either has not yet paid cash it owes or collected cash before earning the revenue, as with the bundles and gift cards in Part A. Interest paid on the van note is part of net income and therefore of operating activities under U.S. standards, while the principal portion is a financing outflow.

The statement answers the bank's question. Operating activities generated $30,950 of cash, less than the $38,400 of net income, mainly because $24,000 went into receivables and inventory as the store grew. Most of the $100,057 increase in cash came from the owners' $80,000 investment and the $25,000 bank loan, not from operations. That distinction matters to lenders. Sloan (1996) found that the cash flow component of earnings tends to persist into future periods more than the accrual component, and that investors did not fully reflect this difference in stock prices. For the store's bank, a net income figure built heavily on rising receivables deserves more scrutiny than one backed by cash. In the course textbook's terms (Williams et al., 2023), this is the statement built to answer questions about where cash came from and went, and this first statement shows a business that is profitable, growing and still dependent on outside financing.

References

Financial Accounting Standards Board. (2014). Revenue from contracts with customers (Topic 606) (Accounting Standards Update No. 2014-09).

Sloan, R. G. (1996). Do stock prices fully reflect information in accruals and cash flows about future earnings? The Accounting Review, 71(3), 289-315. https://doi.org/10.2308/tar-9608042309

Williams, J. R., Bettner, M. S., & Smith, K. R. (2023). Financial & managerial accounting: The basis for business decisions (20th ed.). McGraw-Hill Education.