A firm has entered into a long-term purchase obligation. This will allow the firm to obtain raw materials for operations at a known price over the next 6 years. This obligation must be reflected on the balance sheet as:
Click on the arrows to vote for the correct answer
A. B. C. D.Explanation
It is important to recognize that liabilities arise and are recognized on the balance-sheet only if the firm has consumed at least a part of the services or goods under the contract. Until then, a liability is not admitted since there is no corresponding asset or equity that has been generated (a similar principle holds for the recognition of assets). However, due to the bonding nature of the contract, it must be disclosed in footnotes along with the relevant details so that analysts can figure in the impact of all such agreements while evaluating the future health of the firm.