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Financial & Managerial Accounting
Found in: Page 142
Financial & Managerial Accounting

Financial & Managerial Accounting

Book edition 7th
Author(s) John J Wild, Ken W. Shaw, Barbara Chiappetta
Pages 1096 pages
ISBN 9781259726705

Short Answer

In making adjusting entries at the end of its accounting period, Chao Consulting mistakenly forgot to record:

∙ $3,200 of insurance coverage that had expired (this $3,200 cost had been initially debited to the Prepaid

Insurance account).

∙ $2,000 of accrued salaries expense.

As a result of these oversights, the financial statements for the reporting period will [choose one] (1) understate

assets by $3,200; (2) understate expenses by $5,200; (3) understate net income by $2,000; or

(4) overstate liabilities by $2,000.


Option 2 is correct, understate expenses by $5,200

See the step by step solution

Step by Step Solution

Step 1: Definition of accrued salaries

When salaries are due but not paid, this is known as accrued salaries.

Step 2: Reporting of expenses

In the given situations, expenses are increased by $5,200; hence, according to rules, whenever expenses increase, we understate the expenses by $5,200.

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