In the context of adjusting journal entries for prepaid expenses, a minor mistake in basic math can result in major errors in a company's:

• A. Inventory turnover ratio
• B. Marketing budget
• C. Customer satisfaction surveys
• D. Financial statements

Answer: (D)

Verified step by step guidance

1. Understand the concept of prepaid expenses: Prepaid expenses are payments made in advance for goods or services that will be consumed in future periods. These are recorded as assets initially and then expensed over time as the benefit is realized.
2. Recognize the role of adjusting journal entries: Adjusting entries are made at the end of an accounting period to allocate the portion of prepaid expenses that have been used or expired during the period. This ensures that the financial statements reflect accurate and up-to-date information.
3. Identify the impact of errors in adjusting entries: If the adjustment for prepaid expenses is incorrect, it can lead to errors in the financial statements. For example, overstating or understating expenses can affect net income, retained earnings, and the overall accuracy of the balance sheet and income statement.
4. Connect the error to financial statements: Financial statements are the primary documents affected by mistakes in adjusting entries for prepaid expenses. Errors can distort the company's financial position and performance, leading to incorrect decision-making by stakeholders.
5. Avoid common mistakes: To prevent errors, ensure accurate calculations when determining the portion of prepaid expenses to be expensed. Double-check the math and verify the journal entries to maintain the integrity of the financial statements.