If the Total Amount for Insurance Expense Is Inadvertently Posted

question 44

Multiple Choice

If the total amount for Insurance Expense is inadvertently posted to Prepaid Insurance at the end of the year, what will be the effect on the year-end financial statements?

• A) Revenues will be overstated
• B) Revenues will be understated
• C) Owner's equity will be overstated
• D) Owner's equity will be understated

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Definitions:

Indirect Method

A financial reporting approach used in cash flow statements to reconcile net income with cash flow from operating activities by adjusting for non-cash transactions.

Goodwill

An intangible asset that arises when a buyer acquires an existing business, representing the premium paid over the fair value of the net identifiable assets.

Voting Stock

Shares that give the stockholder the right to vote on matters of corporate policy making and the election of the board of directors.

Fair Value

The price at which an asset or liability could be exchanged between knowledgeable, willing parties in an arm's length transaction.