Auditing and Attestation- Certified Public Accountant (CPA) Practice Exam -

How should a fire that destroyed a plant be reported in financial statements dated before the incident?

1. A. Adjust the value of the building and equipment

2. B. Disclose the effect of the fire with no adjustment

3. C. Adjust the financial statements without disclosure

4. D. Record the loss and disclose it in the notes

The correct answer is: B. Disclose the effect of the fire with no adjustment

The occurrence of a fire that destroys a plant after the financial statement date does not require adjustment to the figures reflected in those financial statements, as the event is considered a non-adjusting subsequent event. According to generally accepted accounting principles (GAAP), non-adjusting events are those that occur after the reporting period but do not provide additional information about conditions that existed at the balance sheet date. In this scenario, the financial statements should disclose the impact of the fire to inform users of the statements about the situation that could significantly affect the company going forward. This disclosure serves the purpose of transparency, ensuring that stakeholders understand any material impacts the incident may have on the company's future operations or financial condition. This reporting approach prevents the misrepresentation of the financial position of the company as of the balance sheet date, while still providing necessary context and information about significant events that have occurred, such as a fire incident that could potentially affect the company’s future profitability or asset valuation.