Misclassifying Accrual as Prepayment Doubles the Error in Expense Adjustment

Steps:

• Correct accrual treatment adds $375 to electricity expenses in the income statement.
• Treating it as prepayment subtracts $375 from expenses instead.
• This reverses the correct addition and applies an incorrect subtraction, understating expenses by $750 total.
• Lower expenses increase profit by $750 more than correct.

Why B is correct:

• Accruals increase expenses per matching principle; prepayments decrease them, so the swap understates expenses (and overstates profit) by twice the amount ($375 × 2 =$750).

Why the others are wrong:

• A: Captures only one adjustment error, ignoring the double impact.
• C: Reverses the direction; expenses (and profit) are overstated, not understated.
• D: Reverses the direction; profit is overstated, not understated.

Final answer: B