United Continental Holdings Inc. is the parent company of both United Airlines and Continental Airlines. On the

Question:

United Continental Holdings Inc. is the parent company of both United Airlines and Continental Airlines. On the 12/31/2012 balance sheet the company lists as a current liability $2.4 billion of “Frequent Flyer Deferred Revenue” and as a long-term liability $2.8 billion for the same account. To reward loyal customers the airlines offer free travel. The footnotes to the 2012 financial statements contain the following information:

The Company has a frequent flyer program that is designed to increase customer loyalty. Program participants earn mileage credits (“miles”) by flying on United, Continental and certain other participating airlines. . . . In the case of the sale of air services, the Company recognizes a portion of the ticket sales as revenue when the air transportation occurs and defers a portion of the ticket sale representing the value of the related miles.

REQUIRED:

a. What is meant by “Deferred Revenue” and where does it fit into the accounting process and the financial statements?

b. Discuss the cash flow implications of the $5.2 billion in deferred revenue for United Continental in 2012 and future years.

c. How do you think an analyst following the company would react to a sharp change (increase or decrease) to the amount of deferred revenue on the balance sheet?

Financial Statements
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial... Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...