When the Amount of a Contingent Liability Can Be Reasonably

question 127

Multiple Choice

When the amount of a contingent liability can be reasonably estimated and its likelihood is probable,the company should:

• A)include a description in the notes to the financial statements.
• B)record the estimated amount of the liability times the probability of its occurrence.
• C)record the estimated amount of the liability on the balance sheet.
• D)exclude the information about the contingent liability from its financial statements and notes.

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Definitions:

Debt-To-Equity Ratio

A financial ratio indicating the relative proportion of shareholders' equity and debt used to finance a company's assets.

Times Interest Earned

A financial ratio that measures a company's ability to meet its debt obligations by comparing its earnings before interest and taxes (EBIT) to its interest expenses.

Gross Margin Percentage

The portion of sales revenue that exceeds the cost of goods sold, expressed as a percentage, indicating the financial health of product sales.

Net Profit Margin Percentage

A financial metric that shows the percentage of revenue remaining after all operating expenses, interest, taxes, and preferred stock dividends have been deducted from total sales.