3. Operating cash flow is often referred to as the lifeblood of a firm. The vaccine makers
received cash up-front from the government for the stockpiled vaccines. Such cash would be
reported to stakeholders (financial analysts, stockholders, lenders, etc.) in the operating
cash flow section of the Statement of Cash Flows in the fiscal period of receipt. Given this,
why would these pharmaceutical companies be so concerned about when the revenue
related to this cash is recognized for income statement purposes? In your response, consider
how recognized revenues are used by firm stakeholders.
The vaccine makers would receive cash up front from the government and it would be recorded
as a cash inflow. Under the guidance issued by the SEC on ASC 605-15-S99-1 as stated in this
case, the pharmaceutical company would be required to record the payment for the vaccines as
deferred revenue. The revenue would be recorded as a liability on the balance sheet as
unearned revenue and revenue from this transaction would not be recorded on the income
statement until the time the vaccines are delivered. This would negatively impact the net income
on the income statement. Net income is a component in many ratios used by shareholders to
evaluate the performance of their investments. This situation has the potential to lead many
investors to believe that the pharmaceutical company is doing poorly. Recognized revenues are
used by stakeholders to monitor and evaluate their investments. If revenue is not recognized
appropriately it can lead to revenue being overstated or understated. In this case, the issue of
