Prudence & Neutality

Question 1

Application of traditional prudence

Answer 1

1. Assets must not be overstated
2. Liabilities must not be undervalued
3. Income must not be exaggerated
4. Profit must not be overstated
5. Costs must not be understated

Question 2

Modern economists reaction to accounting prudence

Answer 2

-asymmetry in traditional accounting, lack of neutrality
-lack of reliability as profits are under reported
-traditional idea of prudence makes it easier to hide profits to make them look smaller than they are
-economists think over estimated profit is just as bad as underestimating profit but transitional think underestimating profit is a good idea

Question 3

Examples of prudence

Answer 3

1. Stock valued at lower of cost or net realisable value
2. Debtors with bad debt provisions attached
3. Slow moving stock provisions
4. Historical cost convention
5. Impairment of fixed assets

Question 4

Accounting estimates, judgements, and prudence

Answer 4

-> intangible assets are growing in significance. These are hard to value and their valuation involve more judgement than traditional tangible assets
-> when judgement is needed it is important it is exercised prudently and based on objective facts

Question 5

Prudence (IMPORTANT)

Answer 5

-being cautious and conservative when making judgements and should be based on objective facts to ensure company is not overvalued or undervalued

Question 6

Give examples of organisations that have and haven’t been prudent

Answer 6

Tesco have been more prudent than Sainsbury’s

Question 7

Impact on organisation of using and not using prudence (IMPORTANT)

Answer 7

-is needed to stabilise the markets and increase trust
-stock markets need prudence