Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

9. Current Liabilities

Contingent Liabilities

Financial Accounting

9. Current Liabilities

Contingent Liabilities

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Multiple Choice

Which statement is true of contingency reserves in financial accounting?

Contingency reserves are not recognized as liabilities until the occurrence of a future event is probable and the amount can be reasonably estimated.

Contingency reserves must be recognized for all possible future losses, regardless of probability.

Contingency reserves are only disclosed in the notes if the loss is remote.

Contingency reserves are always recorded as assets on the balance sheet.

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Verified step by step guidance

Step 1: Understand the concept of contingency reserves. Contingency reserves are amounts set aside to cover potential future liabilities or losses that may arise due to uncertain events.

Step 2: Review the criteria for recognizing liabilities in financial accounting. According to accounting standards, a liability is recognized when the occurrence of a future event is probable and the amount can be reasonably estimated.

Step 3: Analyze the options provided in the problem. Evaluate each statement to determine its accuracy based on the definition and recognition criteria for contingency reserves.

Step 4: Note that contingency reserves are not recognized as liabilities unless the future event is probable and the amount can be reasonably estimated. If the likelihood of the event is remote, the reserves are disclosed in the notes to the financial statements rather than being recorded.

Step 5: Eliminate incorrect statements, such as those suggesting contingency reserves are always recorded as assets or must be recognized for all possible future losses regardless of probability. Focus on the correct statement that aligns with accounting standards.