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 of the following is a contingent liability that must be disclosed in the financial statements?

Accounts payable to suppliers

A fully insured asset

Common stock issued to shareholders

A pending lawsuit with a reasonable possibility of loss

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Verified step by step guidance

Understand the concept of contingent liabilities: A contingent liability is a potential obligation that may arise depending on the outcome of a future event. It is not recorded as a liability on the balance sheet unless it is probable and the amount can be reasonably estimated. However, it must be disclosed in the financial statements if there is a reasonable possibility of loss.

Analyze the options provided: Accounts payable to suppliers is a current liability that is already recorded in the financial statements. A fully insured asset does not represent a liability. Common stock issued to shareholders is equity and not a liability.

Focus on the pending lawsuit: A pending lawsuit with a reasonable possibility of loss fits the definition of a contingent liability. It is not certain but has the potential to result in a financial obligation depending on the outcome of the lawsuit.

Determine the disclosure requirement: Since the pending lawsuit has a reasonable possibility of loss, it must be disclosed in the financial statements to inform users about the potential risk and its impact on the company’s financial position.

Conclude that the correct answer is the pending lawsuit with a reasonable possibility of loss, as it meets the criteria for a contingent liability that requires disclosure in the financial statements.