15.4. Important Accounting Conventions

Try these first

1. 1.

   Explain the conservatism principle in accounting.

   Hint

   Think about how this principle protects stakeholders.

2. 2.

   What does consistency in accounting ensure?

   Hint

   Consider why changes in methods could be problematic.

3. 3.

   What does the conservatism principle require companies to do?

   • Recognize all profits immediately
   • Anticipate no profit but provide for potential losses
   • Ignore potential losses

   Hint

   Think about how businesses protect themselves.

4. 4.

   True or False: The consistency principle allows companies to change their accounting methods as needed without any consequences.

   • True
   • False

   Hint

   Consider the impacts of changing methods on comparability.

5. 5.

   A company has been using straight-line depreciation for its assets. They are considering switching to declining balance depreciation. What steps should they take to comply with the consistency principle?

   Hint

   Think about how changes require transparency and communication.

6. 6.

   When assessing whether to report an expense, how can a company determine if the expense is material?

   Hint

   Consider the potential decision-making impact of the number on stakeholders.