Question

(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 (no loss was accrued).
12. Merger with another company of comparable size.

Short answer

An entity adjusts the sums perceived in its financial statements to reflect altering events, but not to reflect non-adjusting events.

Step-by-step solution

Meaning of Financial Statements

Financial statements are documents that express a company's business practices and monetary success.Government offices, accountants, and corporations, among others, routinely audit financial accounts to ensure accuracy and for valuation, financing, or contribution purposes.

Indicating the different events of the post-balance sheet

1. Adjust the financial statements
2. Neither adjust nor disclose
3. Disclose in notes to the financial statements.
4. Disclose in notes to the financial statements.
5. Neither adjust nor disclose
6. Neither adjust nor disclose
7. Neither adjust nor disclose
8. Disclose in notes to the financial statements.
9. Adjust the financial statements
10. Neither adjust nor disclose
11. Adjust the financial statements
12. Disclose in notes to the financial statements.