Reference no: EM132008524

Cero Inc. is an oil and gas company that operates in the nation of Lumnia. Cero has incurred unforeseen expenses this year because of an environmental lawsuit filed against the company for accidentally causing an oil spill in a marine area in Lumnia. Therefore, despite Cero's earnings being high, the company's net income is much lower than what the company anticipated.

CFO of Cero Inc.: Our operations are compliant to the current environmental laws. Accidents such as the oil spill caused by Cero Inc. are extremely rare. Therefore, the consequences of the environmental impacts of our operations should be categorized as nonrecurring costs in our financial statements.

Cero's shareholder: Cero Inc.'s earnings steadily increase every year. Since the oil spill is a onetime incident, there is no need to worry about its impact on next year's profits.

Which of the following statements, if true, weakens the CFO's argument?

• ?Cero Inc.'s earnings come from many other operations that are based outside Lumnia.
• ?In the future, Lumnia's environmental laws are likely to undergo frequent changes because of increasing environmental activism in Lumnia.
• ?A change in the taxes applicable to Cero Inc. cannot be listed as a nonrecurring expense unless it is unanticipated.
• ?Cero Inc. categorizes any change in accounting principles as a nonrecurring expense.