Like many other large companies, The Cheesecake Factory Inc., has several legal actions pending against the Company at any given time. The Company must accrue for and/or disclose certain contingent liabilities, such as pending or possible legal actions. In the Company's Financial Statements and Notes to the Company's Financial Statements. The necessary reporting depends on the specific circumstances of the situations and the company's attorneys' assessment of the potential outcomes.

Below are 2 hypothetical legal situations that the Company might face:

Situation 1: A former restaurant employee filed a class-action lawsuit alleging The Cheesecake Factory violated the local law when it required employees to purchase their work uniforms. Legal counsel has indicated that the case will probably be settled for $2,500.

Situation 2: A customer filed a lawsuit alleging that The Cheesecake Factory was negligent when she slipped and fell on a wet floor near the bar area in a Cheesecake Factory in Topeka, Kansas. Legal counsel has indicated that the Company will most likely settle this case, but counsel is unable to estimate the dollar amount of the settlement.

Answer Options are:

The Company would need to accrue for a contingent liability and disclose it

The Company should neither accrue nor disclose it

The Company should disclose the contingent liability but not accrue for it