Impact of Defined Benefit Plans on Financial Statements

Easy Employee Compensation Defined Benefit Plans

Company XYZ has a defined benefit pension plan that guarantees employees a certain annual retirement benefit based on their years of service and salary history. This plan is funded through contributions from both the employer and employees. As an analyst evaluating the financial statements of Company XYZ, you need to understand how the accounting for this defined benefit plan would affect the company’s financial position. Which of the following statements best describes the impact of a defined benefit pension plan on Company XYZ's financial statements?

Defined benefit obligations are recorded as a liability on the balance sheet and affect equity through changes in other comprehensive income.

Defined benefit obligations are expensed in full in the income statement during the period they are accrued.

Defined benefit plans only affect cash flow during the periods when contributions are made.

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