Questions: The improper classification of short-term equipment rentals as long-term leases and the subsequent acceleration of revenue from those rentals is a manipulation of which component of the accounting equation? A. Profit B. Liabilities C. Assets D. Owners' equity

The improper classification of short-term equipment rentals as long-term leases and the subsequent acceleration of revenue from those rentals is a manipulation of which component of the accounting equation? A. Profit B. Liabilities C. Assets D. Owners' equity
Transcript text: The improper classification of short-term equipment rentals as long-term leases and the subsequent acceleration of revenue from those rentals is a manipulation of which component of the accounting equation? A. Profit B. Liabilities C. Assets D. Owners' equity
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Solution

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The answer is A: Profit.

Explanation for each option:

A. Profit: The improper classification of short-term equipment rentals as long-term leases and the acceleration of revenue affects the income statement, specifically the revenue and profit figures. By recognizing revenue earlier than it should be, the company is inflating its profit for the period. This manipulation directly impacts the profit component of the accounting equation, as profit is derived from revenues and expenses.

B. Liabilities: This option is incorrect because the manipulation described does not directly affect liabilities. Liabilities would be impacted if there were changes in obligations or debts, but the scenario focuses on revenue recognition.

C. Assets: This option is incorrect because the manipulation primarily affects the income statement rather than the balance sheet. While assets could be indirectly affected if the manipulation leads to changes in cash flow or receivables, the primary impact is on profit.

D. Owners' equity: This option is incorrect because, although owners' equity is ultimately affected by changes in profit (since profit contributes to retained earnings), the direct manipulation is of the profit figure itself.

In summary, the manipulation of revenue recognition directly impacts the profit component of the accounting equation.

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