Question

When preparing the financial statements for the month ended January 31, accrued salaries owed to employees for January 30 and 31 were overlooked. The accrued salaries were included in the first salary payment in February. Indicate which items will be erroneously stated, because of failure to correct the initial error, on (A) the income statement for the month of February and (B) the balance sheet as of February 28.a. Income Statement

Answer 1

A. Income Statement

Salaries Expense - OVERSTATED

Salaries will be overstated because they would be increased by salaries from January when they should not be as only expenses in February should be apportioned to February.

Net Income - UNDERSTATED

With salaries being higher than they should be, they will reduce the Net income more than they should which will lead to the net income being understated.

B. Balance Sheet

Salaries Payable - No effect

Stockholder's Equity - UNDERSTATED

Net income goes to Equity in the form of Retained earnings. If Net income is understated therefore, so also will Net Income be.