Accounting for IGCSE & O level - Advanced Principles (Section 7 - No. 17)
How does the principle of 'prudence' affect financial reporting?
It allows companies to overstate assets.
It allows companies to overstate liabilities.
It encourages recognizing potential losses and expenses.
It encourages recognizing all income as soon as possible.
Explanation
The prudence principle involves a degree of caution when exercising judgments needed in making estimates under conditions of uncertainty.
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