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

Question

Quizplus · Accepted Answer

The principle of conservatism may lead to an understatement of profits in the short term (year one in this case), but this does not permanently reduce the company's profits. Instead, it shifts the recognition of these profits to later years, making profits in those years higher by the amount understated earlier.

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