Question

At the end of the fiscal year, the usual adjusting entry to prepaid insurance to record expired insurance was omitted. Which of the following statements is true?
a. total assets at the end of the year will be understated.
b. insurance expense will be overstated
c. stockholders' equity at the end of the year will be understated.
d. net income for the year will be overstated.
e. None of the above

Answer 1

Answer:

The correct answer is letter "D": net income for the year will be overstated.

Explanation:

Net Income is an important measure of how profitable the company is over a period of time. Net income is calculated by taking the total revenue and subtracting the business expenses which results in the earnings before tax. After taxes are deducted, the amount obtained will be the firm's net income.  

Prepaid insurances are considered expenses of a company. Thus, if the payment of the prepaid insurance was not recorded, the net income of the firm will be overstated.