Final answer:
A Type I subsequent event requires an adjustment to the financial statements because it provides additional information about conditions that existed at the balance sheet date.
Step-by-step explanation:
A Type I subsequent event refers to an event that provides additional information about conditions that existed at the balance sheet date and affects the estimates that are part of financial statement preparation. If such an event occurs, it usually requires an adjustment to the financial statements. This is because the event provides evidence about conditions that were already present at the end of the reporting period but might not have been known at that time. Making an adjustment ensures the financial statements accurately reflect the economic circumstances of the organization as of the balance sheet date.
For example, if a company learns about a lawsuit settlement that relates to a case that originated before the financial statement period ended, the company would need to record this event in the financial statements to accurately represent the company's financial position and results of operations.