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| Laramie Company was started on January 2, 2016. During its first year Laramie Company paid $84,000 for salary expense and accrued $8,000 for salary expense as an adjusting entry at the end of its 2016 accounting period. Use the horizontal model to determine the incorrect statement. |
a. Total assets decreased by $92,000.
b. Net income decreased by $92,000.
c. Retained earnings decreased by $92,000.
d. A cash outflow of $84,000 is shown on the statement of cash flows.
Expert Answer
Answer is option (a) Total assets decreased by $92,000.
Explanation:
Total assets decreased by $92000 is an incorrect statement because paid salary expenses $84000 and accrued salary expenses $8000 will decrease net income and retained earnings as well hence option (b) and (c) both are correct. As per the information of question $84000 is paid in cash hence it will result into outflow of cash in cash flow statement hence this statement is also true.
As we know that all expenses whether paid or incurred are shown in income statement and these reduce net income so as a result reatined earnings are also reduced by same amount because net income ultimately transferred to balance sheet under reatined earnings.
Assets side will be unaffected with this transaction hence option (a) is incorrect.
