Questions: If there is an error in recording an adjusting entry on the income statement causing Net Income to be overstated, then (Check all that apply.) Total stockholders' equity on the balance sheet will be overstated Cash on the balance sheet will be overstated Retained Earnings on the statement of stockholders' equity will be overstated Total assets on the balance sheet will understated

If there is an error in recording an adjusting entry on the income statement causing Net Income to be overstated, then (Check all that apply.) Total stockholders' equity on the balance sheet will be overstated Cash on the balance sheet will be overstated Retained Earnings on the statement of stockholders' equity will be overstated Total assets on the balance sheet will understated
Transcript text: If there is an error in recording an adjusting entry on the income statement causing Net Income to be overstated, then $\qquad$ (Check all that apply.) Total stockholders' equity on the balance sheet will be overstated Cash on the balance sheet will be overstated Retained Earnings on the statement of stockholders' equity will be overstated Total assets on the balance sheet will understated
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Solution

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The correct answers are:

  • Total stockholders' equity on the balance sheet will be overstated
  • Retained Earnings on the statement of stockholders' equity will be overstated

Explanation for each option:

  1. Total stockholders' equity on the balance sheet will be overstated: This is correct. Net income is a component of retained earnings, which is part of stockholders' equity. If net income is overstated, retained earnings will also be overstated, leading to an overstatement of total stockholders' equity.

  2. Cash on the balance sheet will be overstated: This is incorrect. An error in recording an adjusting entry that affects net income does not directly impact cash. Adjusting entries typically involve non-cash items, such as depreciation or accruals, and do not affect the cash balance.

  3. Retained Earnings on the statement of stockholders' equity will be overstated: This is correct. Retained earnings are increased by net income. If net income is overstated, retained earnings will also be overstated.

  4. Total assets on the balance sheet will be understated: This is incorrect. An error in recording an adjusting entry that affects net income does not necessarily impact total assets. The error would need to specifically involve an asset account to cause an understatement of total assets.

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