What Is the Effect on the Financial Statements When a Company

question 44

Multiple Choice

What is the effect on the financial statements when a company fails to accrue interest expense at year-end?

• A)Net income is overstated and assets are overstated.
• B)Expenses are understated and liabilities are understated.
• C)Expenses are understated and stockholders' equity is understated.
• D)Net income is overstated and liabilities are overstateD.Failure to accrue interest expense results in expenses being understated and the resulting interest payable is not increased to reflect the obligation to pay this expense.

---

Definitions:

Minimize Profits

The strategy of reducing profits to a minimum, possibly for tax advantages, ethical reasons, or for future strategic positioning.

Maximize Them

The process of making the most or best of certain resources, outcomes, or situations to achieve the highest possible benefit or efficiency.

Principal-agent Relationships

A framework within economics that describes the dynamics when one entity (the principal) hires another (the agent) to perform a task on their behalf, often involving delegation of decision-making authority.

Observability

The degree to which the internal states of a system are accessible to its external observation, often used in context of controlling complex systems.