32 Lecture - Provisions, Contingent Assets & Contingent Liabilities (Contd) and Income Statement

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32 Lecture

MGT401

Midterm & Final Term Short Notes

Provisions, Contingent Assets & Contingent Liabilities (Contd) and Income Statement

Provisions are amounts set aside for anticipated future expenses or losses, while contingent assets and liabilities are potential gains or losses that depend on certain conditions. These items are recorded on the balance sheet. In contrast, the


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  1. What are provisions in accounting? A. Expected future losses B. Expected future gains C. Current assets D. Current liabilities Answer: A

  2. What is the difference between provisions and contingent liabilities? A. Provisions are certain, while contingent liabilities are uncertain B. Provisions are uncertain, while contingent liabilities are certain C. Provisions are recognized in the income statement, while contingent liabilities are recognized in the balance sheet D. There is no difference between the two terms Answer: A

  3. What is a contingent asset? A. A potential gain that depends on certain conditions B. A potential loss that depends on certain conditions C. An asset that is already owned by the company D. An asset that is not yet owned by the company Answer: A

  4. Which financial statement shows a company's revenues, expenses, gains, and losses over a specific period? A. Balance sheet B. Income statement C. Statement of cash flows D. Statement of changes in equity Answer: B

  5. Which of the following is an example of a contingent liability? A. Lawsuit pending against the company B. Patent owned by the company C. Office furniture owned by the company D. Revenue received in advance by the company Answer: A

  6. How are provisions and contingent liabilities recorded on the balance sheet? A. As assets B. As liabilities C. As equity D. They are not recorded on the balance sheet Answer: B

  7. Which of the following is an example of a provision? A. Warranty expense B. Depreciation expense C. Interest expense D. Rent expense Answer: A

  8. What is the purpose of recognizing contingent assets and liabilities? A. To increase a company's reported assets and liabilities B. To provide additional information about a company's financial health C. To manipulate a company's reported financial results D. There is no purpose for recognizing these items Answer: B

  9. Which financial statement provides information about a company's cash inflows and outflows? A. Balance sheet B. Income statement C. Statement of cash flows D. Statement of changes in equity Answer: C

  10. How are gains and losses recognized on the income statement? A. Gains are recorded as revenue, and losses are recorded as expenses B. Gains are recorded as expenses, and losses are recorded as revenue C. Gains and losses are not recognized on the income statement D. Gains and losses are recorded as equity Answer: A



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  1. What is a provision in accounting, and what is its purpose? Answer: A provision is an amount set aside to cover anticipated future expenses or losses. Its purpose is to ensure that a company has enough funds to cover expected future costs.

  2. What is a contingent liability, and how is it recognized on the balance sheet? Answer: A contingent liability is a potential obligation that depends on the occurrence or non-occurrence of one or more uncertain future events. It is recognized on the balance sheet when it is probable that the obligation will result in an outflow of resources, and the amount can be reliably estimated.

  3. How are provisions and contingent liabilities different from each other? Answer: Provisions are amounts set aside for anticipated future expenses or losses, while contingent liabilities are potential obligations that depend on the occurrence or non-occurrence of one or more uncertain future events.

  4. What is a contingent asset, and how is it recognized on the balance sheet? Answer: A contingent asset is a potential asset that depends on the occurrence or non-occurrence of one or more uncertain future events. It is not recognized on the balance sheet unless it is virtually certain that the asset will be realized.

  5. What is the income statement, and what information does it provide? Answer: The income statement is a financial statement that shows a company's revenues, expenses, gains, and losses over a specific period, such as a quarter or a year. It provides information about a company's profitability and potential for growth.

  6. How are gains and losses recognized on the income statement? Answer: Gains are recognized as revenue, and losses are recognized as expenses on the income statement.

  7. How does recognizing a provision affect a company's financial statements? Answer: Recognizing a provision reduces a company's net income and shareholders' equity while increasing its liabilities.

  8. What is the difference between a contingent liability and a guarantee? Answer: A contingent liability is a potential obligation that depends on the occurrence or non-occurrence of one or more uncertain future events, while a guarantee is a legal promise to make good on a debt or obligation if the debtor or obligor fails to do so.

  9. What are some examples of contingent assets? Answer: Examples of contingent assets include lawsuits that the company is likely to win, insurance claims that the company has filed, and potential tax refunds.

  10. Why is it important for companies to recognize both contingent assets and liabilities? Answer: Recognizing contingent assets and liabilities provides investors and analysts with additional information about a company's potential gains and losses, which can help them make more informed investment decisions.

Provisions, contingent assets, and contingent liabilities are important accounting concepts that can affect a company's financial statements. Provisions are amounts set aside to cover anticipated future expenses or losses, while contingent liabilities are potential obligations that depend on the occurrence or non-occurrence of uncertain future events. Contingent assets, on the other hand, are potential assets that depend on the occurrence or non-occurrence of uncertain future events. It is important for companies to recognize both contingent assets and liabilities to provide investors and analysts with additional information about the company's potential gains and losses. Provisions and contingent liabilities are recorded on the balance sheet as liabilities, while contingent assets are not recognized unless it is virtually certain that the asset will be realized. Recognizing a provision reduces a company's net income and shareholders' equity while increasing its liabilities. It is important to note that provisions should be recognized when it is probable that the expected expense or loss will occur, and the amount can be reliably estimated. The income statement is a financial statement that shows a company's revenues, expenses, gains, and losses over a specific period. It provides information about a company's profitability and potential for growth. Gains are recognized as revenue, and losses are recognized as expenses on the income statement. The income statement is an important tool for investors and analysts as it helps them evaluate a company's financial performance and make informed investment decisions. In conclusion, provisions, contingent assets, and contingent liabilities are important accounting concepts that can affect a company's financial statements. Recognizing these items accurately and timely is essential for a company's financial reporting and transparency. The income statement is an important financial statement that provides valuable insights into a company's financial performance and potential for growth.

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