Probable Losses

Probable Losses

See Also:
Accounting Principles
Subsequent Events
Business Segments
Accounting Changes

Probable Losses Definition

Probable losses disclosure or the disclosure of loss contingencies is usually a concern for ongoing litigation proceedings or perhaps the discontinuance of an operation that will likely see a loss when it is sold. This form of probable accounting falls under the disclosure principle which states that a company must report a probable loss before it occurs if the amount can be readily estimated and it is likely the event will happen.

Probable Losses Example

Case Entertainment Co. has a business line that makes VHS systems. However, technology has reached a point where VHS systems have become obsolete to the new DVD disc players which is another line which Casa Entertainment owns. Looking to future Casa has decided that it would like to discontinue the VHS operations which have begun to show losses and expand the profitable DVD operations. Casa has had the plant and its operation equipment appraised as it gets ready to dispose of the line. After appraisal the company has shown that it will see a loss on the disposal of the assets of $125 million. The discontinuance of the operations net of taxes has shown that the company will post a further loss of $5 million. The income from continuing operations will be $400 million. Therefore the Casa should show the following on the bottom of it’s income statement.
Income from continuing operations……………………………$400 million
Discontinued Operations:
Loss from operation…………………………………………………… $(5 million)
Loss on Disposal………………………………………………………… $(125 million)
Net Income ………………………………………………………………….$270 million
Note: The following was most likely accrued for over the year or since the decision was made to discontinue the operation.
Probable Losses

ARTICLES YOU MIGHT LIKE

Financial Ratios

See also:Quick Ratio AnalysisPrice to Book Value AnalysisPrice Earnings Growth Ratio AnalysisTime Interest Earned Ratio Analysis Use of Financial Ratios Financial Ratios are used to measure financial performance against standards. Analysts compare financial ratios to industry averages (benchmarking), industry standards or rules of thumbs and against internal trends (trends analysis). The most useful comparison when

Read More »

CPA’s are Specialized

The Difference in CPAs Looking back at my career I don’t know how many times I have introduced myself to someone and they ask, “Are you a CPA?” and I say yes. Then they tell me “you must be very busy with tax season” and I look at them with a bit of awe and

Read More »

Accounting VS. Bookkeeping

In our industry we often run into businesses that do not understand the difference between bookkeeping and accounting.  It is not the business owner’s fault. After all, they are in the business of making money for whatever service or product they sell.  But, to know if you are making any money you need to measure

Read More »

JOIN OUR NEXT SERIES

Financial Leadership Workshop

MARCH 28TH-31ST 2022

SHARE THIS ARTICLE
Share on facebook
Share on twitter
Share on linkedin

JOIN THE NEXT STRATEGIC CFO™ SERIES

Strategic CFO™ Financial Leadership Workshop
The Art of the CFO®

Days
Hours
Min
Sec

June 13th - 16th 2022