What Is the Effect on the Financial Statements When a Company

question 56

Multiple Choice

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

• A)Net income is overstated and stockholders' equity is understated.
• B)Expenses are understated and stockholders' equity is understated.
• C)Expenses are understated and liabilities are overstated.
• D)Net income is overstated and assets are overstateD.Failure to record depreciation results in expenses being too low, net income being overstated and assets being overstated.Not recording depreciation expense fails to increase accumulated depreciation that, as a contra-asset, fails to decrease assets.

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Definitions:

Increasing Opportunity Cost

A situation where producing more of one good or service leads to a larger increase in foregone production of another good or service.

Economic Growth

The increase in the inflation-adjusted market value of the goods and services produced by an economy over time, typically measured as the percent rate of increase in real GDP.

Full Employment

An economic situation in which all available labor resources are being used in the most efficient way possible, often characterized by the absence of cyclical unemployment.

Technology Level

A measure of the degree of sophistication and advancement of a society's tools, techniques, and methods of production.