Which of the Following Answers Would Accurately Describe the Bias

question 5

Multiple Choice

Which of the following answers would accurately describe the bias in the CPI resulting from the fact that oil prices suddenly increase?

• A) The CPI would underestimate the cost of living.
• B) The CPI would overestimate the cost of living.
• C) The CPI would not be biased as a result of a sudden rise in oil prices.
• D) The CPI could overestimate or underestimate the cost of living, depending upon the quantity of oil purchased in that year.

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Definitions:

Expense Recognition Principle

An accounting principle that matches expenses with the revenues they helped to generate, recognizing expenses in the same period as the revenues.

Direct Write-off Method

An accounting method where uncollectible accounts receivable are directly removed from the accounts when deemed irrecoverable.

Materiality Constraint

An accounting principle that allows the omission or misstatement of figures that are not significant enough to influence the decision-making process of users of financial statements.

Expense Recognition Principle

An accounting principle that dictates the timing of reporting an expense, aligning it with the revenue it generates to accurately reflect financial performance.