The conservatism constraint:
A) Prescribes that when multiple estimates of amounts to be received or paid in the future are equally likely, then the least optimistic amount should be used.
B) Prescribes that a company use the same accounting methods period after period.
C) Prescribes that revenues and expenses be reported in the period in which they are earned or incurred.
D) Prescribes that all items of a material nature be included in financial statements.
E) Prescribes that all inventory items be reported at full cost.

Question

Quizplus · Accepted Answer

The conservatism constraint, also known as the principle of prudence, states that when multiple estimates of amounts to be received or paid in the future are equally likely, then the least optimistic amount should be used. This helps to avoid overstating assets or income, as well as understating liabilities or expenses.

The Conservatism Constraint