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 market approach in valuing inventories.
C)Use of the same accounting method from one period to the next in computing depreciation 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 use of the lower of cost or market approach in valuing inventories is the best example of the accounting concept of conservatism as it results in a more conservative estimate of the value of inventory. This means that it recognizes a loss in value of inventory immediately rather than waiting for the sale of the inventory, which reflects the principle of conservatism. Option A is incorrect as it represents the matching principle, and option C is incorrect as it represents the consistency principle. Option D is incorrect because deliberate understatement of assets is not in accordance with generally accepted accounting principles.

Which of the Following Best Illustrates the Accounting Concept of Conservatism