We've covered two key principles that require professional judgment: conservatism (when in doubt, be cautious) and materiality (is this big enough to matter?). Let's practice applying them to real-world situations.
Engagement Message
Why is professional judgment so important for these two principles?
Type
Swipe Left or Right
Practice Question
For each scenario, decide if the main principle being applied is conservatism or materiality.
Labels
- Left Label: Conservatism
- Right Label: Materiality
Left Label Items
- Recording inventory at the lower of its cost or market value.
- Recognizing a potential lawsuit loss as soon as it's probable.
- Estimating a higher amount for potential warranty claims.
Right Label Items
- Deciding not to disclose a $50 error in a multi-billion dollar company.
- Expensing the cost of a $15 wastebasket immediately instead of depreciating it.
- Combining all minor office expenses into one line item.
Type
Multiple Choice
Practice Question
A company discovers a $5,000 payment was improperly recorded. In which case is this error most likely to be considered qualitatively material?
A. It was a simple bookkeeping mistake. B. It was a payment to a supplier that was miscategorized. C. It was a secret payment made to a government official to win a contract. D. It was an accidental overpayment to an employee.
Suggested Answers
- A
- B
- C - Correct
- D
Type
Fill In The Blanks
