Does prudence concept allow a business to build substantially higher reserves or provisions than that are actually required?

A. Yes

B. No

C. To some extent

D. It depends on the type of business

Answer: Option B

Solution(By Examveda Team)

Prudence is the application of caution in the exercise of the judgements needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated. However, the exercise of prudence does not allow, for example, the creation of hidden reserves or excessive provisions, the deliberate understatement of assets or income, or the deliberate overstatement of liabilities or expenses, because the financial statements would not be neutral and therefore, not have the quality of reliability.

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Comments ( 1 )

  1. Manoj Kumar
    Manoj Kumar :
    5 years ago

    how the answer is b.

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