A certain contingent liability was evaluated at year-end; the company felt it was probable that it would become an actual liability, and the amount could be reasonably estimated. If the accountant decided not to report it on the balance sheet or in the notes to the financial statement, what effect would it 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.

Question

Quizplus · Accepted Answer

If the accountant decided not to report the contingent liability on the balance sheet or in the notes, the liabilities on the balance sheet would be understated. This would misrepresent the financial position of the company and potentially mislead users relying on the financial statements. It would not affect net income as the liability is not yet realized.

A Certain Contingent Liability Was Evaluated at Year-End; the Company