18.8. Provisions vs Reserves

Try these first

1. 1.

   What is a provision?

   Hint

   Think of it as preparation for future costs.

2. 2.

   Do reserves affect net profit?

   Hint

   Consider the difference between expenses and appropriations.

3. 3.

   What is a provision?

   • An expense account
   • An appropriation of profits
   • A mandatory amount set aside for liabilities

   Hint

   Think about preparation for expenses.

4. 4.

   Are reserves mandatory in accounting?

   • True
   • False

   Hint

   Consider whether companies must legally set aside these funds.

5. 5.

   A company has a net income of $150,000. If it decides to set aside$30,000 for potential warranty claims, what will be the new net income?

   Hint

   Subtract the provision amount from net income.

6. 6.

   Discuss a scenario where failing to set a provision could lead to financial misrepresentation.

   Hint

   Consider regulations and the impact on stakeholder confidence.