Under What Condition Should a Pending Lawsuit Be Recognized as a Liability

question 115

Multiple Choice

Under what condition should a pending lawsuit be recognized as a liability on a company's balance sheet?

• A)The outcome is reasonably possible.
• B)The outcome is probable.
• C)The amount can be reasonably estimated.
• D)Both the outcome is probable and the amount can be reasonably estimateD.A contingent liability should be recorded in the financial statements as a liability if the outcome is considered probable and the amount owed can be reasonably estimated. If it is considered only reasonably possible, it is only disclosed in the footnotes.

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Definitions:

Pro Forma Sales Forecasts

Pro forma sales forecasts are projected financial statements showing expected sales revenue, often used for planning and investment assessment.

Pro Forma Statements

Financial statements that project a company's financial performance in the future, based on certain assumptions and adding or excluding non-recurring items.

Anticipated Rate of Growth

The expected annual increase in a company's revenue or profit, often expressed as a percentage.

Financial Leverage

The use of borrowed funds with a fixed cost to finance the assets of the business to increase the potential return to shareholders.