The Conservatism Constraint

question 194

Multiple Choice

The conservatism constraint:

• A)Requires that when more than one equally likely estimate of amounts is expected to be received or paid in the future,then the less optimistic amount should be used.
• B)Requires that a company use the same accounting methods period after period.
• C)Requires that revenues and expenses be reported in the period in which they are earned or incurred.
• D)Requires that all items of a material nature be included in financial statements.
• E)Requires that all inventory items be reported at full cost.

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Definitions:

Interest Expense

The expenses an entity bears over a period for using borrowed capital.

Short-term Creditors

refers to entities or individuals that lend money or extend credit for short periods, typically less than a year, including suppliers and banks.

Liquidity

A measure of how easily assets can be converted into cash without significant loss of value, indicating the ability of an entity to meet its short-term obligations.

Price-Earnings Ratio

A measurement that contrasts a firm's stock price with its earnings per share to determine if its shares are valued appropriately.