At the End of the Current Year, a Company Overstated

question 59

Multiple Choice

At the end of the current year, a company overstated prepaid insurance by $80,000 and understated supplies expense by $100,000. Its effective tax rate is 40%. As a result of this error, net income is:

• A) Overstated by $108,000.
• B) Overstated by $12,000.
• C) Understated by $108,000.
• D) Understated by $12,000.

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Definitions:

Long-Run Average Cost Curve

A graphical representation showing the lowest possible cost per unit that can be achieved for any given level of production when all factors of production are variable.

Average Total Cost

The aggregate expense of manufacturing (sum of constant and variable expenses) spread over the total units produced.

Marginal Cost

The upsurge in full costs resulting from the fabrication of an additional unit of a product or service.

Marginal-Cost Curve

A graphical representation showing how the cost to produce one additional unit of a good or service changes as production volume changes.