Question

Creating a provision against fluctuation in the price of investment is an example of the accounting convention of _____.

A. Conservatism
B. Full disclosure
C. Materiality
D. Consistency

Answer 1

A provision against fluctuation in the price of investment is an example of the accounting convention of Conservatism.

Step-by-step explanation:

Creating a provision against fluctuation in the price of investment is an example of the accounting convention of Conservatism.

The convention of Conservatism dictates that a company should account for potential losses and expenses in a cautious manner, anticipating that they are more likely to occur than gains. By creating a provision, a business is setting aside funds to cover any potential losses or decreases in the value of their investments due to fluctuating prices.

For example, if a company has invested in stocks and the market experiences a downturn causing the stock prices to drop, the company may use the provision to offset the decrease in value, thus protecting their financial position.