Asked by Morgan Beasley on May 19, 2024
Verified
What is the effect on the financial statements when a company fails to accrue revenue earned at year-end?
A) Net income is understated and assets are understated.
B) Revenue is understated and stockholders' equity is overstated.
C) Revenue is understated and assets aren't affected.
D) Net income is understated and liabilities are overstated.
Accrue Revenue Earned
The process of recording revenue that has been earned but not yet received in cash or billed to the client.
Financial Statements
Reports that summarize the financial performance, position, and cash flows of a business over a specific period.
Net Income
The total profit of a business after all expenses, including taxes and interest, have been deducted from revenue, reflecting the company's profitability.
- Familiarize yourself with the impact of neglecting to make required adjusting entries on net income, assets, liabilities, and stockholders' equity.
Verified Answer
MA
Melissa AmadorMay 24, 2024
Final Answer :
A
Explanation :
Failing to accrue revenue earned at year-end would result in an understatement of net income and assets. This is because revenue earned should be recognized in the period in which it is earned, regardless of when payment is received. If the revenue is not accrued, it will not be reflected on the income statement, leading to an understatement of net income. Additionally, the omission of the revenue will result in an understatement of assets, as the cash or accounts receivable that would be generated from the recognized revenue will not be reflected on the balance sheet.
Learning Objectives
- Familiarize yourself with the impact of neglecting to make required adjusting entries on net income, assets, liabilities, and stockholders' equity.