Question

What is violated here?

Ace Appliance Company is involved in a major lawsuit involving injuries sustained by some of its employees in the manufacturing plant. The company is being sued for $2,000,000, a material amount, and is not insured. The suit was not disclosed in the most recent financial statements because no settlement had been reached.

Answer 1

Ace Appliance Company violated accounting principles by not disclosing a material lawsuit in its financial statements, misleading stakeholders about potential significant financial outcomes.

Step-by-step explanation:

When Ace Appliance Company chose not to disclose a major lawsuit in its financial statements, it violated accounting principles related to the disclosure of contingent liabilities. Companies are required to inform stakeholders of any potentially significant financial impacts.

Not disclosing a $2,000,000 lawsuit, especially when uninsured, can mislead investors, creditors, and other users of the financial statements. The principle violated here underscores the importance of transparency in business operations to maintain trust and provide a true representation of a company's financial health.