If a Company Fails to Adjust a Prepaid Rent Account

question 177

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- staed.
• 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:

Avoidable Costs

Expenses that can be eliminated if a particular decision is made or if an activity is ceased.

Sunk Costs

Costs that have already been incurred and cannot be recovered, and should not affect future business decisions.

Irrelevant Costs

Costs that will not be affected by a decision and should not be considered when making that decision.

Periodic Basis

A method of accounting where financial and inventory records are updated at regular, fixed intervals.