When Converting an Income Statement from a Cash Basis to an Accrual

question 108

Multiple Choice

When converting an income statement from a cash basis to an accrual basis, which of the following is incorrect?

• A)An adjustment for depreciation reduces the net income.
• B)An adjustment for bad debts increases the net income.
• C)A reduction in prepaid expenses decreases net income.
• D)An increase in accrued payables decreases net income.

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Definitions:

Perpetual System

An inventory system that continually updates inventory records and cost of goods sold after each purchase or sale.

Cost of Goods Sold

Refers to the specific expenses directly linked to the creation of the products a company sells.

Perpetual LIFO

A method of inventory valuation where the last items added to inventory are considered the first items sold, continuously updated in real-time.

Purchases and Sales

This involves transactions related to buying (purchases) and selling (sales) goods or services, critical to determining a business's revenue and inventory levels.