What Is the Effect on the Financial Statements When a Company

question 56

Multiple Choice

What is the effect on the financial statements when a company fails to record depreciation expense at year-end?

• A)Net income is overstated and stockholders' equity is understated.
• B)Expenses are understated and stockholders' equity is understated.
• C)Expenses are understated and liabilities are overstated.
• D)Net income is overstated and assets are overstateD.Failure to record depreciation results in expenses being too low, net income being overstated and assets being overstated.Not recording depreciation expense fails to increase accumulated depreciation that, as a contra-asset, fails to decrease assets.

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Definitions:

Net Sales

The total revenue from sales after deducting returns, allowances for damaged or missing goods, and any discounts allowed.

Accounts Receivable Turnover

A financial metric that measures how often a company collects its average accounts receivable within a specified period, indicating the efficiency of credit and collections.

Total Sales

The aggregate revenue a company generates from selling its goods or services within a specific period.

Direct Write-off Method

A method of accounting for bad debts where specific uncollectible accounts receivable are directly written off against income at the time they are deemed to be uncollectible.