Question

Walden Industries is being sued by a former employee for wrongful termination. It is probable that the company will lose the case and be ordered to pay the plaintiff a significant sum of money. If Walden fails to report this information somewhere in its financial statements, it is violating the GAAP concept of:

1) Materiality
2) Full disclosure
3) Matching
4) Cost-benefit

Answer 1

Walden Industries would be violating the GAAP concept of Full disclosure if it fails to include information about the probable loss from a wrongful termination lawsuit in its financial statements.

Step-by-step explanation:

If Walden Industries fails to report the probable loss from a lawsuit by a former employee in its financial statements, it is violating the GAAP concept of Full disclosure. The Full disclosure principle requires that financial statements include all material information which is likely to influence an informed reader's decision.

This principle aims to present a complete and transparent picture of the company's financial health and operations. Omitting such significant information misleads stakeholders and can have serious consequences, as exemplified by the historical cases of Wal-Mart's legal battles over wrongful termination and discriminatory practices.