Question

Can someone please explain to me in words why

Thanks!

Part 3 Assume that Soze's accountant had forgotten to make the two adjusting entries proceeded to create financial statements using the incomplete, incorrect data. How wou omissions affect the following accounts overstate, understate, or no elect Forgetting that the Cargo insurance expired makes: expenser more enten guneler het insurare en pre-peal ismerce ED Revenues 2 Expenses Net income unelertreterly over Assets Undercotelyover Liabilities no effect Owners equity vurderetettel wer statel Forgetting that the consulting services have been performed makes: Revenues undertakeel Expenses mo fhreiben Net income umeleteket Assets no este Liabilities to effect, rover stateel Owners equity Utretentikeel

Answer 1

Insurance is an expense.Hence it gets effected on expense and net profit

Revenue Doesn't get effected as omission of expense has no role in income determination

Expenses are understated means shown less in finacial statements.If the insurance is considered the expenses would have been more

Net income is overstated means shown more in Financial staements due to omission of expense

we know net income = Revenue - Expense

If the insurance is considered the expenses would have been more.Hence the net income will be more due to omission of expense

Assets are overstated since forgetting the cargo insurance expired doesn't lead to reduction of prepaid insurance which is a current asset

Hence Assets are overstated by the amount of insurance expired

Liabilities have no effect since every aspect has dual effect ,The effect of insurance has on expenses and Assets not on liability

Owner's equity is overstated due to omission of insurance expense recognition in Financial statements

Owner's Equity=Share capital+Reserves & surpluses(Includes profit & loss)

Since we already discussed that Profit has been overstated which has effect on overstatement on reserves & surpluses which in return leads to overstatement of Owner's equity

Consulting Services

Revenues are understated since Consulting service performance is an income to an entity which has not considered in Accounts leads to under reporting of income in Financial statements

Exepnses has no effect due to omission of consulting services which is an income.

Net income is understated since income is not considered in financials

Assets are understated since cash or debtor has not been considered due to omission of consulting services recording

Liabilities have no effect in relation to income

Owner's equity is understated due to omission of consulting services performed recognition in Financial statements

Owner's Equity=Share capital+Reserves & surpluses(Includes profit & loss)

As discussed, Net income is understated which in turn leads to understatement of owner's equity