A Contingency Was Evaluated at Year-End and Considered to Have

question 177

Multiple Choice

A contingency was evaluated at year-end and considered to have a remote possibility of becoming an actual liability.If this was not reported on the balance sheet or in the notes to the financial statements,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:

Net Present Value

A method used in capital budgeting to evaluate the profitability of an investment by calculating the total present value of its expected future cash flows minus the initial investment cost.

Rate Of Return

The gain or loss on an investment over a specified period, expressed as a percentage of the investment's initial cost.

Present Value

The present worth of a future amount of money or series of cash flows, calculated using a given interest rate.

Annuity

A series of equal cash flows at fixed intervals.