Which of the following is NOT an example of applying conservatism in accounting?

Question

Which of the following is NOT an example of applying conservatism in accounting?

 

A. Recording contingent losses that are probable.

 

B. Expensing all research and development costs are they are incurred.

 

C. Using the lower-of-cost-or-market rules for inventory accounting.

 

D. Increasing the useful life used in calculating depreciation.

Answer 1

Conservatism in accounting typically means that you want to understate (be as conservative as possible with regard to) the earnings.  

Looking at the 4 examples, C and D would definitely allow you to show your costs to be lower then they have been

previously calculated.

 

The issue with expensing your R&D costs as incurred means that a company could manipulate their earnings by decreasing or increasing their investment in R&D. While if the R&D costs are amortized that would smooth out any effort to manipulate earnings.

 

Recording contingent losses that are probable is merely facing the facts around an inevitable cost or loss.

 

I hope that this is helpful.