If a Company Fails to Adjust a Prepaid Rent Account

question 141

Multiple Choice

If a company fails to adjust a Prepaid Rent account for rent that has expired, what effect will this have on that month's financial statements?

• A)Failure to make an adjustment does not affect the financial statements.
• B)Expenses will be overstated and net income and stockholders' equity will be under- stated.
• C)Assets will be overstated and net income and stockholders' equity will be understated.
• D)Assets will be overstated and net income and stockholders' equity will be overstated.

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Definitions:

Contribution Margin Ratio

The percentage of each sales dollar remaining after deducting variable costs, used to cover fixed costs and profit.

Margin Of Safety

The difference between actual or expected sales and the break-even point, expressing the level of sales fall that can be tolerated before a loss occurs.

Contribution Margin Ratio

The percentage of sales revenue that exceeds variable costs, representing how much revenue contributes towards covering fixed costs and generating profit.

Monthly Fixed Expense

Costs that do not fluctuate with the volume of production or sales, such as rent, salaries, and insurance, incurred on a monthly basis.