Question

On December 31, Year 1, Gaskins Co. owed $4,500 in salaries to employees who had worked during December but will not be paid until January, Year 2. If the year-end adjustment is properly recorded on December 31, Year 1, what will be the effect of this accrual on net income and cash flows from operating activities reported for Year 1?

a. No effect on net income; no effect on cash flow from operating activities
b. Decrease in net income; no effect on cash flow from operating activities
c. Increase in net income; decrease in cash flow from operating activities
d. No effect on net income; decrease in cash flow from operating activities

Answer 1

b. Decrease in net income; no effect on cash flow from operating activities

Step-by-step explanation:

The adjusting entry is shown below:

Salaries expense A/c Dr $4,500

To Salary payable A/c Dr $4,500

(Being the accrued salary is recorded)

As we can see that the salaries expense is an expense account due to which the net income got decreased plus the salary payable has come under current liabilities of the balance sheet so there is no impact on the cash flow from operating activities