Question

The concept of conservatism has been influential in the development of accounting theory and practice. A major effect of conservatism is that accountants tend to recognize losses, but not gains. For example, when the value of an asset is impaired, it is written down to fair value and an unrealized loss is recognized in the income statement. However, when the asset’s value appreciates, its value is not written up to fair value. (An exception is current accounting for investments in securities having readily determinable fair values.) Stated differently, accountants tend to recognize holding losses, but not holding gains.

Required:
a. Define conservatism.
b. Why do you believe conservatism has affected financial reporting? Explain.
c. Do you believe that financial statements that recognize losses but not gains provide information that is relevant and representationally faithful? Explain.
d. Do you believe that the concept of conservatism is consistent with the physical capital maintenance concept? Explain.
e. Do you believe that the concept of conservatism is consistent with the financial capital maintenance concept? Explain.



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  • CreatedDecember 17, 2014
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