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CMA Foundation · Fundamentals of Financial and Cost Accounting · Four Frameworks of Accounting and Forms of Organization

Reddy Hardware has been using the written down value method of depreciation on its machinery for several years. This year it changes to the straight line method merely because the owner wants to show a higher profit, without telling anyone. Which accounting convention or principle is chiefly violated?

The convention violated is consistency. Accounting policies such as the depreciation method should be applied uniformly from year to year so that results remain comparable. Switching methods only to show higher profit, with no valid reason or disclosure, defeats comparability and breaches this convention.

  1. AConsistencyCorrect
  2. BMateriality
  3. CConservatism
  4. DMoney measurement

Explanation

Consistency requires that the same accounting methods be applied from period to period so that results are comparable. Changing the depreciation method without a justified reason breaks this. Conservatism concerns anticipating losses, and materiality concerns the importance of information, so neither is the main issue here.

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