The Conservatism Principle in Accounting Means That a Company Should

question 14

Multiple Choice

The conservatism principle in accounting means that a company should:

• A)report enough information in its financial statements for outsiders to make knowledgeable decisions about the company.
• B)report items in the financial statements at the least favorable amounts.
• C)use the same accounting methods and procedures from period to period.
• D)perform strictly proper accounting for items and transactions that are significant to the company's financial statements.

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Definitions:

Compensating Balance

Compensating Balance is a minimum bank account balance that a borrower must maintain as part of a loan agreement, often used by banks as a requirement for extending a loan.

Interest Rate

The percentage of principal charged by the lender for the use of its money or the return earned on deposited funds.

Effective Interest Rate

The actual return on an investment, taking into account the effect of compounding interest.

Cash Cycle

The process that manages the time it takes for a company to convert its investments in inventory and other resources into cash flows from sales.