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CS Executive · Corporate Accounting and Financial Management · Accounting Standards

Which of the following is the most important consideration in selecting and applying accounting policies under AS 1 when different treatments are possible?

Accounting policies must be selected so that the financial statements present a true and fair view of the state of affairs and the profit or loss. In doing so, prudence, substance over form and materiality are the major considerations, not profit levels, convenience or competitor practice.

  1. AChoosing the policy that shows the highest profit for the year
  2. BPresenting a true and fair view of the state of affairs and profit or loss, using prudence, substance over form and materialityCorrect
  3. CFollowing the policy used by the largest competitor in the industry
  4. DAdopting the policy that is easiest for the accounts department to apply

Explanation

AS 1 says policies should be selected so that financial statements give a true and fair view. Prudence, substance over form and materiality are the major considerations. Profit maximisation, imitation of competitors or convenience are not criteria set by the standard.

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