Question

You are the CEO of Fisher Corporation. You are very concerned with presenting the best financial picture possible to the owners of your company. Unfortunately, Fisher has a lawsuit pending at the end of the year, which could result in the company having to pay a large sum of money. On the bright side, Fisher also has business deal that might go through, which could result in the company making a large gain. The principle of conservatism would say that which of the following is true?

a. Fisher should not report the potential loss related to the lawsuit.
b. Fisher should report the possible gain from the business deal.
c. Fisher should report the potential liability it has related to the lawsuit.
d. Fisher should report the potential cash inflow it could receive from the business deal.

Answer 1

c. Fisher should report the potential liability it has related to the lawsuit.

Step-by-step explanation:

Remember, the principle of conservatism is one that encourages businesses to prioritize their future losses in their financial reports over any future gains.

Therefore, based on the principle of conservatism, instead of reporting the business deal could result in the company making a large gain, Fisher should report the potential liability (losses) it has related to the lawsuit.