On December 31, Year 1, Gaskins Company owed $4,500 in salaries to employees who had worked during December but will not be paid until January, Year 2. If the year-end adjustment is properly recorded on December 31, Year 1, what will be the effect of this accrual on net income and cash flows from operating activities reported for Year 1?

Question

Quizplus · Accepted Answer

The accrual will decrease net income for Year 1 because the expense was incurred in Year 1, but the payment will not be made until Year 2. However, there will be no effect on cash flows from operating activities in Year 1 because the payment will not be made until Year 2.

On December 31, Year 1, Gaskins Company Owed $4,500 in Salaries