What Is the Effect on the Financial Statements When a Company

question 8

Multiple Choice

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

• 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.Failure to reduce prepaid insurance expense to reflect insurance coverage that has been used results in the prepaid asset account being overstated and the insurance expense account being understated.The result is that net income and assets are overstated.

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Definitions:

Endothermic Animals

Organisms that can regulate their body temperature through internal metabolic processes, often referred to as warm-blooded animals.

Four-Chambered Hearts

A heart structure consisting of two atria and two ventricles, found in mammals and birds, allowing for efficient oxygenation of blood.

Air Sacs

Air sacs are part of the avian respiratory system, providing birds with the ability to engage in highly efficient gas exchange.

Warm-Blooded

Organisms, primarily mammals and birds, capable of maintaining a constant body temperature regardless of environmental conditions.