9. A large lawsuit has been filed against Mahoney Corp Mahoney has recorded a loss and related estimated liability that is equal to the maximum possible amount that it feels it might lose. Mahoney is confident , however, that either it will win the suit or it 39 will owe a much smaller amount 40 Principle Qualitative Charactertic

The principle being applied here is **prudence (or conservatism)**. The qualitative characteristic being applied is **faithfulness**.<br /><br />Mahoney Corp. is exercising prudence by recording a loss and liability equal to the *maximum* potential loss. Prudence dictates that when there's uncertainty about the outcome, a company should recognize potential losses but not potential gains. While Mahoney is confident they will win or pay less, the principle of prudence requires them to account for the worst-case scenario at this time. This ensures that the financial statements don't overstate the company's financial position.<br /><br />This application of prudence supports the faithful representation of the company's current financial position. By recording the maximum potential loss, the financial statements provide users with information that is complete and neutral, reflecting the potential impact of the lawsuit without understating the liability.<br />