PRC-1 · Chapter 4 · Question 39 of 100
The accountant of 'Metro Logistics' forgot to record the unexpired portion of the annual vehicle insurance as a prepayment at year-end. How does this omission specifically affect the financial statements?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) Profit is understated, and current assets are understated.
Explanation
Failing to recognize a prepayment leaves the entire amount in the expense account, overstating expenses and therefore understating profit. It also omits the asset from the balance sheet, understating current assets.
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