CFA Level 1: Impact on Financial Statements | Test Prep

Impact on Financial Statements

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Question

On Jan. 1, DataCom prepays $3,000 rent for Mar. 1, June 1, and Sept.

1. Under accrual basis accounting, what is the impact on the Feb. financial statements?

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Explanations

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A. B. C. D.

B

In order to match expenses with revenues for the period, the cost of prepaid insurance should be allocated to each accounting period. The asset value is decreased (credit), and an expense is recognized (debit), thus decreasing net income.

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