Question

On December 31, Year 1, Gaskins Co. owed $4,500 in salaries to employees who had worked during December but would be paid in January. If the year-end adjustment is properly recorded on December 31, Year 1, what will be the effect of this accrual on the following items for Gaskins? Net Income Cash Flow from Operating Activities

A. No effect No effect
B. Decrease No effect
C. Increase Decrease
D. No effect Decrease

Answer 1

B. Decrease No effect

Step-by-step explanation:

As for any financial year when there is any outstanding liability then that liability is increased, for current year.

Provided, salary for the month of December is to be paid in January next year.

Therefore on accrual basis the expense will be added to current year which will decrease net income of current year.

Now talking about cash flow, under direct method it will not be considered as no cash payment is involved and in case of indirect method,

net income will be considered where salary expense is deducted,

Further increase in outstanding liability of salary, is added to operating activity as increase in current liability is added to operating cash flows.

Correct option therefore, is

B. Decrease No effect