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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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What is conservatism? Why do accountants sometimes find it necessary to be conservative in financial reporting?

To determine

Define the term conservatism and also specify the reason under which the accountants sometimes find it necessary to be conservative in financial reporting.

Explanation

Conservatism:

Conservatism is an accounting assumption, it is as an approach used by the accountants to avoid the overstating of net assets and net income when the amounts are uncertain.

When accounting valuations are uncertain and the alternative method of valuation seems to be equally possible, in these cases the accountant should select the method that has a least likely to overstate the company’s assets and income in the current period. The conservatism sometimes results in reporting lower asset value or higher liability values, when the value of the assets and the liabilities are uncertain...

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