If Deferred Revenue exceeds Cash plus Savings, what might this imply?

• A. Spending restricted funds
• B. Increased liquidity
• C. Reduced profitability
• D. Higher asset turnover

Answer: (A)

Deferred revenue is a liability representing cash received for goods or services not yet delivered. If that liability is larger than the cash and savings available, the organization faces liquidity constraints: it has more future obligations than it has immediate cash to cover them. In nonprofit accounting, this situation can mean that funds which are restricted for specific purposes may need to be used to meet obligations, since unrestricted cash isn’t enough to cover current needs. The other implications don’t fit as well: liquidity isn’t increased, profitability isn’t directly impacted by this balance alone, and asset turnover (sales relative to assets) isn’t governed by the gap between deferred revenue and cash.