The Following Event Occurred After the Company's Year-End but Before

question 20

Essay

The following event occurred after the company's year-end but before the completion of the audit. For this subsequent event, determine whether the event:
•requires an adjustment to the year-end financial statements,
•requires note disclosure, or
•requires neither adjustment to recognized amounts nor disclosure.
There is a fire at the company's only warehouse; the company has insufficient fire insurance to replace the warehouse and contents such that a material loss will result and operations will be curtailed for six months. (Justify your recommendation)

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Definitions:

Credit Balances

Balances within accounts that indicate the amount owed to a creditor; commonly found in liability and equity accounts.

Stockholders' Equity

Shareholders' equity in a corporation, defined by the excess of asset value over the amount of liabilities.

Interest Expense

The cost incurred by a company for borrowing funds, represented as the interest payments made on any borrowed capital.

Operating Income

Earnings before interest and taxes (EBIT), calculated by subtracting operating expenses from gross profit.