What is the effect on the financial statements when a company fails to record depreciation expense at year-end?
A)Net income is overstated and stockholders' equity is understated.
B)Expenses are understated and stockholders' equity is understated.
C)Expenses are understated and liabilities are overstated.
D)Net income is overstated and assets are overstateD.Failure to record depreciation results in expenses being too low, net income being overstated and assets being overstated.Not recording depreciation expense fails to increase accumulated depreciation that, as a contra-asset, fails to decrease assets.

Question

Quizplus · Accepted Answer

Failure to record depreciation results in the assets being overstated since accumulated depreciation is not increased as a contra-asset. This overstatement of assets leads to an overstatement of net income since depreciation expense, a non-cash expense, reduces net income. However, the failure to record depreciation also reduces stockholders' equity since retained earnings are not reduced by the amount of the understated expense. Therefore, choice D is the correct answer as it reflects both the overstatement of net income and assets, as well as the understatement of stockholders' equity.

What Is the Effect on the Financial Statements When a Company