A corporation has been sued for product failures allegedly resulting in injuries to the individuals bringing the lawsuit. The company's lawyers believe it is more than remote, but less than probable, that the lawsuit will result in an actual liability. Which of the following actions should be taken by the company's management?

A. Management should consider resigning

B. The situation should be described in a note to the financial statements.

C. The liability should be estimated and recorded as an expense.

D. The possible liability should be ignored.

The correct answer is B. The situation should be described in a note to the financial statements.

Explanation:

The notes to the Financial Statements represent clarifications or explanations of facts or situations that are quantifiable or not that are presented in the movement of the accounts, which must be read together to the Financial Statements for a correct interpretation. They also represent important information for investors who wish to buy shares of a company through the Stock Market, since they generally show relevant information to consider that will determine the behavior of the value of the shares.

The notes to the financial statements represent the dissemination of certain information that is not directly reflected in those statements, and that is useful for users to make decisions on a clear and objective basis. This does not imply that these explanatory notes are a financial statement, since according to current regulations they are not, rather they are an integral part of them as part of the analysis, and their presentation is mandatory. On the other hand, these notes represent disclosures applicable to balances of transactions or other significant events, which must be observed to prepare and present the financial statements.