What Is the Effect on the Financial Statements When a Company

question 4

Multiple Choice

What is the effect on the financial statements when a company fails to adjust the unearned revenue account for revenues earned at year-end?

• A)Net income is understated and assets are understated.
• B)Revenues are understated and liabilities are understated.
• C)Net income is understated and liabilities are overstated.
• D)Revenues are understated and stockholders' equity is overstateD.Failure to recognize revenues that were previously reported as unearned results in lower revenues = lower net income figure; overstated unearned revenue = overstated liabilities.

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Definitions:

Distribution

The process of delivering products from the production or service facility to the end user, including storage, transportation, and logistics.

Stock Split

A corporate action in which a company divides its existing shares into multiple shares to boost the liquidity of the shares.

Common Stockholders' Equity

Represents the equity invested by common shareholders, along with retained earnings or losses.

Retained Earnings

The portion of net income not distributed as dividends but retained by the company to reinvest in its core business or to pay debt.