Question

1. Within the financial statements how will management use the financial statements to mitigate their risk as it pertains to their current liabilities? Who else will be focused on them and why?

2. What are contingent liabilities and why is management and others concerned about them?

Answer 1

1) Financial statements record all the transactions and highlight key areas as well as the profitability of the firm. By calculating various ratios and analyzing them may help management to plan for the future. In order to mitigate their risk as it pertains to their current liabilities, the company will calculate liquidity ratio and solvency ratio. If these are too high, it means the company is not able to utilize its resources properly and if it is too low the company is not able to manage its current assets. Therefore, it must be idle. Investors, suppliers, and all the stakeholders are interested in this information as it explains how efficiently company is working and investing in the company or supplying goods to the company will be profitable or not in the near future. As the interest of all stakeholders lies in the company, they are interested in information that tells them about profitability and efficiency of company.

2) Contingent liabilities are the liabilities that arise in the future. It is a potential liability that may arise in the future and probability or chances of its occurrence are more. Therefore such liability must be recorded in the books of account. Management and others are concerned about these liabilities as they are more probable to occur in the future and they must be prepared for this. As such liabilities lead to losses and a decrease in assets of the organization. Management must take steps so that there are fewer chances for such a situation in the future.