Module I· Three-Statement Mechanics & LinkagesIntermediate
Question
How does accrual recognition differ from cash recognition — with an example?
Answer
Accrual logic (income statement)
Recognition when economically incurred — revenue when the good or service is delivered, expense when the resource is consumed.
Cash logic (cash flow statement)
Recognition on the actual movement of money — when the cash lands in or leaves the account.
Deep diveShow more details
Example — MidCap Software Inc sells a 3-year SaaS license
Inputs:
- Contract value: $360m (pro-rata over 36 months)
- Payment timing: 1 Jan 2024, in full upfront
Income-statement revenue vs. cash received over the contract term:
```
Year IS revenue Cash received
2024 $120m $360m
2025 $120m $0
2026 $120m $0
```
Balance sheet, day 1
Cash +$360m, deferred revenue +$240m ($120m flows through 2024 as recognized revenue; $240m sits as a liability awaiting release over 2025–2026).
Consequence
SaaS companies often have OCF >> net income because of upfront payments. An important pitch point in SaaS valuation.