A Contingency Must Be Accrued in the Accounts and Reported

question 17

Multiple Choice

A contingency must be accrued in the accounts and reported in the financial statements when

• A) the amount of the loss can be reliably estimated and it is probable that an asset is impaired or a liability incurred.
• B) it is evident that an asset has been impaired or a liability has been incurred even though the amount of the loss cannot be reliably estimated.
• C) it is not certain that funds will be available to settle damages that may arise from a pending lawsuit.
• D) a loss is expected and its amount is uncertain.

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Definitions:

Variable Costs

Expenses that vary directly with the level of production or sales volume, such as materials and labor.

Pretax Income

The income that a company earns before any taxes are deducted, representing the profitability of the company before government intervention.

Break-even Point

The level of production or sales at which total costs equal total revenues, resulting in no profit or loss.

Fixed Costs

Costs that are constant regardless of the volume of goods or services produced by a company, including lease payments and maintenance expenditures.