Financial statements should be prepared with a downward measurement bias. Assets and revenues should not be overstated, while liabilities and expenses should not be understated.
Basic Principles Revisited: Historical Cost and ConservatismRecall the historical cost principle, which requires a company to record the value of its resources (such as land) at its original cost even if the current fair market value is considerably higher. Accordingly, the historical cost principle is an example of conservatism; assets are not allowed to be overstated. |
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