A Contingency Was Evaluated at Year-End

question 6

Multiple Choice

A contingency was evaluated at year-end.Management felt it was probable that this would become an actual liability and the amount could be reasonably estimated.If this was not reported on the balance sheet or in the notes to the financial statements,what is the effect 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 Income

An entity's earnings after all expenses, including taxes and operating costs, have been deducted from revenues.

Physical Inventory

The process of counting and verifying the actual quantities of merchandise or goods in stock.

Absorption Cost

An accounting method that assigns all manufacturing costs (both fixed and variable) to products, making them fully absorbed into the cost of goods sold.

Fixed Overhead

The portion of a company's fixed costs that are not directly tied to production levels, such as rent and insurance.