A Certain Contingent Liability Was Evaluated at Year-End, and Considered

question 60

Multiple Choice

A certain contingent liability was evaluated at year-end, and considered to have a remote possibility of becoming an actual liability. If the accountant decided not to report it on the balance sheet or in the notes to the financial statement, what effect would this have on the financial reporting of the company?

• A)There would be no effect.
• B)The liabilities on the balance sheet would be understated.
• C)The information about the transaction would be inadequately disclosed in the notes.
• D)The net income of the company would be understated.

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Definitions:

Economic Profit

Revenue minus the opportunity cost of resources used; usually less than the accounting profit.

Accounting Profit

Revenue minus explicit cost.

Factors of Production

The resources used in the creation of goods and services, traditionally categorized into land, labor, capital, and entrepreneurship.

Opportunity Cost

The real cost of an item: what you must give up in order to get it.