Problem:
What is the effect on the financial statements when a company fails to adjust the prepaid insurance expense account at year-end for insurance coverage that has been used?
- Net income is overstated and stockholders' equity is understated.
- Expenses are understated and stockholders' equity is understated.
- Expenses are understated and net income is understated.
- Net income is overstated and assets are overstated.
Note: Please show the work not just the answer.