Which of the following actions are consistent with the notion of "prudence"?
A)deliberate overstatement of expenses to reduce profits.
B)excessive provisions for warranty expenses.
C)careful assessment of doubtful debts.
D)adoption of accelerated depreciation method to reduce profits.
E)moving forward unrealised sales to increase profits.

Question

Quizplus · Accepted Answer

The notion of "prudence" in accounting refers to the concept of caution when making judgments under conditions of uncertainty. It suggests that assets or income should not be overstated, and liabilities or expenses should not be understated. Essentially, prudence is about being conservative in financial reporting and not allowing for the overestimation of financial position or performance.
Given the options, the actions consistent with the notion of prudence are:
3. Careful assessment of doubtful debts - This action is prudent because it involves evaluating the likelihood of debts being unpaid and making allowances for them. It ensures that the accounts receivable are not overstated and reflects a realistic view of the potential income.
The other options are not consistent with prudence:
1. Deliberate overstatement of expenses to reduce profits - This is not prudent as it involves intentionally misrepresenting expenses to manipulate profits. Prudence is about accurate representation, not deliberate distortion.
2. Excessive provisions for warranty expenses - While making provisions for warranty expenses is a prudent practice, doing so excessively goes beyond the principle of prudence. It could lead to understating profits without a reasonable basis.
4. Adoption of accelerated depreciation method to reduce profits - Choosing an accelerated depreciation method may be a legitimate accounting policy choice, but if it is done specifically to reduce profits rather than to reflect the asset's usage pattern accurately, it would not be considered prudent.
5. Moving forward unrealized sales to increase profits - This is the opposite of prudence, as it involves recognizing income before it is certain. Prudence dictates that revenue should only be recognized when it is earned and realizable.
In summary, the action that is consistent with the notion of prudence is the careful assessment of doubtful debts, as it reflects a conservative and realistic approach to financial reporting.

Which of the Following Actions Are Consistent with the Notion