Conservatism is which of the following? A. the requirement that if an asset's value falls over...
Conservatism is which of the following?
A. the requirement that if an asset's value falls over time it will continue to be reported at its original cost.
B. the requirement that when faced with uncertainty about the numbers to report, accountants must use the least optimistic measure.
C. the requirement that businesses should intentionally understate assets.
D.the requirement that businesses should intentionally overstate liabilities.
Homework Answers
Answer: B. the requirement that when faced with uncertainty about the numbers to report, accountants must use the least optimistic measure.
Explanation: The principle of conservatism in accounting refers to the recording of expenses and liabilities as soon as possible whether the same are certain or uncertain. However, under conservatism, the revenues and assets are recorded only when they are assured of being received. Thus, the least optimistic measure is used for reporting the financial numbers. Hence, option B. is the correct answer.
Continuing to record an asset at its original cost when its value is falling over time, is against the principle of conservatism and hence option A. is incorrect.
Intentionally understating assets or overstating liabilities without substantial reason for doing so is not conservatism and hence options C. and D. are incorrect.
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