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Hey, future bankers!

Hope everyone is doing well! Today we’re covering deferred revenue, how you deal with criticism, and Elon’s visit to China.

🚀 Let’s get into it.

🔢 Technical Question

What is deferred revenue? Why is it considered a liability?

Deferred revenue, also known as unearned revenue, refers to advance payments a company receives for products or services that are to be delivered or performed in the future. When a company receives such prepayments, it records the amount as deferred revenue, which is classified as a liability on its balance sheet. Let’s delve into the details:

1. Why Is Deferred Revenue a Liability?

   • Unearned revenue is considered a liability because it reflects revenue that has not been earned yet. It represents products or services that are owed to a customer.

   • As the product or service is delivered over time, it is proportionally recognized as revenue on the income statement.

2. How Deferred Revenue Works:

   • When a company receives an advance payment (such as subscription fees, prepaid services, or deposits), it creates a deferred revenue entry.

   • This payment is considered a liability because there is still a possibility that the good or service may not be delivered, or the buyer might cancel the order.

   • Generally accepted accounting principles (GAAP) require certain methods and conventions that encourage accounting conservatism. Companies report the lowest possible profit by recognizing earned revenue only when they have completed specific tasks and when the likelihood of payment is certain.

   • Over time, as the company delivers the promised services or products, the deferred revenue is gradually recognized on the income statement as earned revenue.

3. Cautions and Considerations:

   • Contracts can stipulate different terms. Sometimes, no revenue is recorded until all services or products have been fully delivered.

   • Bypassing the deferred revenue account and posting directly to revenue on the income statement is considered aggressive accounting and can overstate sales revenue.

Overall, deferred revenue represents income received in advance for goods or services that the company has not yet provided. It is a liability because the company has an obligation to deliver the promised goods or services in the future.

🗣 Behavioral Question

How do you deal with criticism?

Consider the following best practices to provide a thoughtful and constructive response:

1. Brainstorm Your Answer:

   • Before the interview, take time to reflect on past experiences. Recall instances when you received feedback or faced criticism at work.

   • Consider how you responded, whether you accepted the feedback constructively, and any changes you made based on it.

2. Use the STAR Method:

   • Structure your answer using the STAR method:

     • Situation: Describe the context of the criticism (e.g., a project, task, or interaction).

     • Task: Explain what you were expected to do or achieve.

     • Action: Detail how you handled the criticism. Did you actively listen? Did you remain open-minded?

     • Result: Share the positive outcome—did you improve, adapt, or resolve the issue?

3. Explain How Criticism Helped You Grow:

   • Emphasize that you view criticism as an opportunity for growth. Discuss how it motivated you to enhance your skills or adjust your approach.

   • Highlight specific instances where you applied feedback to improve your performance.

🗞 Industry News

📈 Tesla Shares Soar As Elon Goes to China

Elon Musk visited China to seek approval for Tesla's driver-assistance system, a key revenue source that could help the company reverse its declining sales. Tesla secured in-principle approval from the Chinese government, but details and conditions are still unclear. This is a significant win for Tesla as China is the world's biggest auto market and getting this approval could be a "golden opportunity" according to analysts.

Tesla overcame two major hurdles: reaching a deal with Chinese tech giant Baidu for mapping and navigation, and meeting data security and privacy requirements. This approval comes despite safety concerns surrounding Tesla's driver-assistance systems in the US, which are currently under investigation.

Read more about this story below.

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