How does deferred revenue impact financial statements?

When deferred revenue is recorded, it signifies that a company has received cash or a promise of payment for goods or services that it has yet to provide. This creates a liability for the company, as it now has an obligation to deliver those goods or services in the future.

Thus, deferred revenue reflects upcoming obligations for the company, which is why this choice is correct. When the service or product is eventually delivered, the revenue is recognized in the income statement, and the deferred revenue liability is reduced.

This concept is crucial for understanding cash flow and financial obligations. Clearing this liability ensures that the financial statements provide an accurate picture of a company's financial health and its future commitments.

The other options do not accurately capture the nature of deferred revenue. While it may have an impact on cash flow when cash is received, it does not represent an immediate cash increase in terms of revenue recognition until the obligations are fulfilled. It does not increase long-term assets since deferred revenue is recorded as a liability, nor does it specifically affect only tax liabilities, although its treatment could have tax implications when recognized as income.