Agilent Technologies, Inc., a diversified technology company, sells extended warranties for the products and services provided to customers, deferring the revenue until future recognition. The following information about the extended warranty liability account was taken from Agilent’s annual report (dollars in millions);
a. Draw a T-account for the extended warranty liability, record the activity disclosed above in that account, and explain how the entries represent an application of the matching principle.
b. Explain how the cash flow for warranties is different from the profitability of warranties.