What Is the Effect on the Financial Statements When a Company

question 8

Multiple Choice

What is the effect on the financial statements when a company fails to adjust the prepaid insurance expense account at year-end for insurance coverage that has been used?

• A)Net income is overstated and stockholders' equity is understated.
• B)Expenses are understated and stockholders' equity is understated.
• C)Expenses are understated and net income is understated.
• D)Net income is overstated and assets are overstateD.Failure to reduce prepaid insurance expense to reflect insurance coverage that has been used results in the prepaid asset account being overstated and the insurance expense account being understated.The result is that net income and assets are overstated.

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Definitions:

Cash Flow

The total amount of money being transferred into and out of a business, especially as affecting liquidity.

Operating Activities

Activities related directly to the primary, day-to-day operations of a business, including sales, production, and administrative functions.

GAAP

Generally Accepted Accounting Principles, which are standardized guidelines for accounting practices.

Operating Activities

Business activities that relate directly to the production, sale, and delivery of a company's products or services.