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Post Balance sheet events: adjust, disclose or neither

Post-Balance-Sheet Events) For each of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose.

_____ 1. Settlement of federal tax case at a cost considerably in excess of the amount expected at year-end.
_____ 2. Introduction of a new product line.
_____ 3. Loss of assembly plant due to fire.
_____ 4. Sale of a significant portion of the company's assets.
_____ 5. Retirement of the company president.
_____ 6. Prolonged employee strike.
_____ 7. Loss of a significant customer.
_____ 8. Issuance of a significant number of shares of common stock.
_____ 9. Material loss on a year-end receivable because of a customer's bankruptcy.
_____10. Hiring of a new president.
_____11. Settlement of prior year's litigation against the company.
_____12. Merger with another company of comparable size.

Solution Preview

1. a. Adjustment is necessary to correct an estimate to a known amount which we assume is material.

2. c. No disclosure unless it seriously changes the nature of the revenue stream of the company. Not likely in this case.

3. b. Subsequent disclosure would be important to a stakeholder reading the financial statements because it may impact the earnings capability of the company in the new year.

4. b. Probably disclosure would be appropriate because a sale of significant amounts of assets either indicates a business contraction or a total change in business structure. Either would be a notable event to a reader of the financial statements. If the company was ...

Solution Summary

The solution lists 2 or 3 sentences in explanation for the response to each items listed.

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