Final answer:
Both (a) Income from Operations will be overstated and (b) Liabilities will be understated and Stockholders' Equity will be overstated are true when a company fails to record accrued interest expense. This mistake results in overstating net income, and thereby, overstating stockholders' equity and understating liabilities.
Step-by-step explanation:
If a company neglects to make an adjusting entry to record accrued interest expense, the impact on the financial statements can be significant. Accrued interest expense is an expense that has been incurred but not yet paid. By not recording it, the company is essentially not recognizing an expense that it should, and this has several implications.
Answer choices (a) and (b) are both true consequences of not recording the accrued interest expense. The absence of an adjusting entry results in:
- Income from Operations being overstated, because expenses are understated without the interest expense being accounted for, thus inflating income.
- Liabilities being understated, because the company has an outstanding obligation to pay interest that it has not recognized.
- Stockholders' Equity being overstated, which occurs as a result of overstating net income, which is part of equity.
Choices (c) and (d) are not accurate in this context. There should be no impact on assets from not recording an accrued interest expense adjusting entry. Net Income will not be understated; it will actually be overstated due to the missing expense.