Which of the following best illustrates the accounting concept of conservatism?
A)Use of the allowance method to recognize bad debt losses from credit sales
B)Use of the lower of cost or NRV approach in valuing inventories
C)Use of the same accounting method from one period to the next in calculating amortization expense
D)Utilization of a policy of deliberate understatement of asset values in order to present a conservative net income figure

Question

Quizplus · Accepted Answer

The accounting concept of conservatism suggests that potential losses should be recognized as soon as possible, while potential gains should only be recognized when they actually occur. Therefore, the use of the lower of cost or NRV approach in valuing inventories is a conservative approach because it recognizes any potential losses in the value of inventory, even if they have not yet occurred. Choice A is also a valid accounting concept, but it does not specifically relate to conservatism. Choices C and D do not illustrate the concept of conservatism.

Which of the Following Best Illustrates the Accounting Concept of Conservatism