Question

Why should product warranties be disclosed in the financial reports? select answer from the options below

O they are contingencies.
O they are considered covenants with the customer.
O they are capitalized upon redemption.
O they are operating expenses.

Answer 1

Product warranties are disclosed in financial reports because they represent contingencies that can potentially lead to future expenses for the company. As such, they are accounted for as liabilities when the product is sold, ensuring transparency in the company's financial situation for investors and creditors.

Step-by-step explanation:

Product warranties should be disclosed in the financial reports because they are contingencies. A warranty is a promise to fix or replace the product if there are any faults within a specific period. This represents a potential future expense that the company may incur if the product does not meet certain standards or malfunctions. Hence, it impacts the firm's financial position and performance and must be reported as part of comprehensive financial accounting practices.

In accounting, such warranties are treated as a liability when the product is sold. This is because the company has an obligation to address any valid warranty claims which may arise in the future.

Accurately reporting this information helps maintain transparency for investors and creditors who have an interest in understanding the full scope of the company's potential expenses and commitments.