Accrued compensation (an unpaid expense) rises by $10 at a 40% tax rate. What happens?

• There is no income statement impact because the compensation has not been paid out in cash yet
• Net income falls $6; cash rises $4 as the accrued liability builds; the balance sheet stays balanced
• Net income falls $6 and cash also falls $6, matching the after-tax cost of the accrued compensation
• Net income rises $4, since the tax savings on the accrued expense more than offset the charge itself
• Net income falls $10 and cash falls $10, since recording the compensation expense means the cash goes out to employees this period