Constraint 4: Conservatism

Financial statements should be prepared with a downward measurement bias. Assets and revenues should not be overstated, while liabilities and expenses should not be understated.

Basic Principles Revisited: Historical Cost and Conservatism

Recall the historical cost principle, which requires a company to record the value of its resources (such as land) at its original cost even if the current fair market value is considerably higher.

Accordingly, the historical cost principle is an example of conservatism; assets are not allowed to be overstated.

8. Estimates and Judgments
Exercise
Q1:Financial statements cannot contain any estimates or judgments:
True
False
9. Consistency
Exercise
Q1:Company management has discretion to choose a different method for recording inventories every year:
True
False
10. Conservatism
Exercise
Q1:Which of these statements are ...

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