On December 31, 20X1, Deal, Inc. failed to accrue the December 20X1 sales salaries that were payable on January 6, 20X2. What is the effect of the failure to accrue sales salaries on working capital and cash flows from operating activities in Deal's 20X1 financial statements?

a. Working capital Cash flows from operating activities

b. Overstated No effect

c. Overstated Overstated

d. No effect Overstated

e. No effect No effect

Overstated No effect

Explanation:

In case salaries are not raised at the end of 20X1, wages owed are known, an existing obligation. Current assets minus current commitments equals working capital. Working capital is exaggerated when current liabilities are overstated.

Increasing pay in 20X1, even if it had accurately been accrued, would never have been paid at the rest of 20X1. Thus, the failure to increase salaries does not affect 20X1 operating cash flow.