Chapter 6, Problem 1QC

Which principle or concept states that businesses should use the same accounting methods and procedures from period to period?

a. Disclosure

b. Conservatism

c. Consistency

d. Materiality

To determine

Accounting concepts and principles: Financial statements are prepared in accordance with the guidelines of “GAAP” (Generally Accepted Accounting principles). The main objective of GAAP is to protect the interest of the investors and ensure fair business practice.

To Find: The principle or concept states that businesses should use the same accounting methods and procedures from period to period.

Answer to Problem 1QC

(c) Consistency

Explanation of Solution

Explanation for correct answer:

Consistency principle states that the same accounting principle should be followed over a period of years. The accounting methods for valuation of assets, liabilities, and inventories should not be changed from period to period. There should be a consistency in the accounting method followed.

Explanation for incorrect answers:

• Option (a) is incorrect because disclosure principle ensures, all financial information relating to the company are recorded; hence all financial information is reported.
• Option (b) is incorrect because conservatism principle states that all uncertain financial expenses and losses but not uncertain future gains should be recorded to safeguard itself from any future financial difficulties. According to this convention, the anticipated losses in future are the losses for the company, but the anticipated gains are not considered profit for the company.
• Option (d) is incorrect because materiality constraint focuses, on recording financial transactions which have a significant impact on the financial statement; hence it requires that the accounting standards must be followed for all items of significant size.

Conclusion

Therefore, the correct option is (c).