Question

Which of the following is correct?

A.) Working capital is measured as current liabilities minus current assets.

B.) Deferred revenues are considered increases to stockholders' equity.

C.) Deferred revenues will eventually become revenue earned.

D.) Working capital increases when a company pays the principal on a long-term note.

Answer 1

The correct option is C
Reason: Deferred Revenue or Unearned income are liability of a company. Deferred Revenue is revenue received however, services or goods are yet to be delivered. Therefore, deferred revenue will eventually become earned revenue as soon as services/goods are provided for same.

Reason why other options are incorrect.

Option A is incorrect
Reason: Working Capital = Current Assets - Current Liabilities.

Option B is incorrect.
Reason: Deferred Revenue do not increase shareholder's equity as they are not profits rather liabilities.

Option D is incorrect.
Reason: Payment of principal will reduce cash balance. Cash is current asset and since working capital = current asset - current liabilities, it will reduce.

If you have any doubt, ask me in the comment section.