If reported profits are reduced by $5,000 in year one because of the operation of prudence:
A) profits in later years must be $5,000 higher.
B) profits in later years will be $5,000 lower.
C) profits in later years will be unaffected.
D) none of the above.

Question

Quizplus · Accepted Answer

The principle of prudence may lead to an understatement of profits in the current year (year one) by recognizing potential losses or expenses early. This conservative approach means that if these losses or expenses do not materialize in later years as expected, the profits in those later years could be higher by the amount that was initially set aside or recognized prematurely, in this case, $5,000.

If Reported Profits Are Reduced by $5,000 in Year One