(Learning Objective 1, 3: Linking deferrals and cash flows) This exercise builds from a simple situation to a slightly more complex situation. Vodafone, the British wireless phone service provider, collects cash in advance from customers. All amounts are in millions of pounds sterling, (£) the British monetary unit. Assume Vodafone collected £500 in advance during 2008 and at year end still owed customers phone service worth £100.
1. Show what Vodafone will report for 2008 on its Income statement • Balance sheet
2. Use the same facts for Vodafone as in item 1. Further, assume Vodafone reported unearned service revenue of £70 back at the end of 2007. Show what Vodafone will report for 2008 on the same financial statements. Explain why your answer here differs from your answer to item 1.