What Is the Effect on the Financial Statements When a Company

question 97

Multiple Choice

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

• 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.

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Definitions:

Capital Drawing

Withdrawals made by the owner(s) from the business for personal use, reducing the total capital invested in the business.

Journalize

The process of recording business transactions in the journal as part of the accounting cycle.

Transactions

Financial events that result in changes to the financial position of a company, such as sales, purchases, and payments.

Equipment

Long-term assets that are used in the production of goods and services; these are tangible in nature.