Response to Client Ii

In: Business and Management

Submitted By student101
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Financial statements are in place to provide users with accurate information on performance and changes in financial position to be used in decision-making processes. Therefore, they need to be understandable, relevant, reliable, and comparable. These statements are used by users not only to look at the current situation, but also to predict the company’s ability to continue as a going concern or functioning as a business entity in the future. The balance sheet and the valuations for assets and liabilities are a reflection of the company’s financial position for the next 12 months. If there are uncertainties or contingencies that occur they must be disclosed in the footnotes section of the statement and in some circumstances reflected in the actual reporting (Schroeder, Clark, & Cathey, 2005).

Pending Lawsuit A contingency is a possible event that will have some effect on the company. Pending lawsuits are considered a contingency because of possible outcomes that will impact the company’s financials. Litigation is a costly and length process that can work against a company’s good reputation regardless of the outcome. The future financial position may be affected by the information presented regarding the potential litigation outcome and therefore disclosure is required. Because of the high probability of losing the lawsuit it should be reported on the balance sheet as a liability instead of notification in the footnotes (Schroeder, Clark, & Cathey, 2005). This disclosure provides users with relevant information, but may be used against the company by the plaintiff to assist in proving their case. The Financial Accounting Standards Board (FASB) reviews the nature of contingencies in the Statement of Financial Accounting Standards (SFAS) No. 5 “Accounting for Contingencies,” and defines two types of contingencies. There are gain contingencies, which…...

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