CFA Practice Question

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CFA Practice Question

Which of the following statement(s) is (are) true?

I. The conservatism concept is designed to avoid overstatement of financial strength or earnings.
II. Accountants' preference for using dollar amounts that are relatively factual, as opposed to merely matters of personal opinion, is called objectivity.
III. All expenditures benefiting more than one time period can be precisely divided by accounting periods.
IV. The accrual basis of accounting calls for recording revenue in the period in which it is earned and recording expenses in the period in which they are incurred.
A. I, II and III
B. II, III and IV
C. I, II, IV
Explanation: I. Conservatism is the traditional accounting practice of resolving uncertainty by choosing the solution that leads to the lower (more conservative) amount of income being recognized in the current accounting period.
II. Objectivity refers to the accountants' preference for using dollar amounts that are relatively factual - as opposed to merely matters of personal opinion. Objective measurements can be verified.
III. Precise allocation to accounting periods is possible with some expenditures; however, for many expenditures, especially those involving assets with relatively long lives, estimations and approximations are necessary.
IV. Under the accrual basis of accounting, the effect of events on the business is recognized as services are rendered or consumed rather than when cash is received or paid.

User Contributed Comments 2

User Comment
gill15 Expenses are not recognized when they incur. They are recognized in the same period where the associated R is recognized. Confused.
bidisha What about the matching principle
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