A contingency was evaluated at year-end and considered to have a reasonable possibility of becoming an actual liability.If this was not reported 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.

Question

Quizplus · Accepted Answer

Contingencies that have a reasonable possibility of becoming actual liabilities should be disclosed in the notes to the financial statements. Failure to do so results in inadequate disclosure about potential financial obligations, impacting the users' ability to fully understand the financial position and risks of the company. It does not directly affect the balance sheet liabilities or net income until the contingency becomes an actual liability.

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