An increase in accrued compensation by $10 would result in which of the following on the Income Statement?

• A. Net Income increases by $10
• B. Taxes payable increase by $4
• C. Accrued compensation increases Current Assets
• D. Operating Expenses increase by $10

Answer: (D)

An increase in accrued compensation affects the income statement as an expense. Accrued compensation represents wages earned by employees that have not yet been paid, so recognizing it increases operating expenses by the amount accrued. In this case, operating expenses rise by $10, which, all else equal, reduces pretax income and net income by $10. Taxes payable wouldn’t jump by a specific amount from this alone, and accrued compensation is a liability on the balance sheet (not a current asset), so it does not increase Current Assets.