Smokey's Sandwich Shoppe paid $3,000 for a 2-year insurance policy on March 1, 2018. The accountant forgot to make any adjustments during the year. What effect would this have on the financial statements for 2018?
A) Net income would be overstated by $1,250.
B) Net income would be understated by $1,250.
C) Assets would be overstated by $3,000.
D) Assets would be understated by $3,000.
A) Net income would be overstated by $1,250.
Explanation: missing adjustment for 10 months - $3,000 × 10/24 = $1,250, so expenses understated and net income overstated by that amount.
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