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    Question

    Creating Provision against fluctuation in the price of

    investment is an example of which accounting convention: 
    A Convention of conservatism Correct Answer Incorrect Answer
    B Convention of full disclosure Correct Answer Incorrect Answer
    C Convention of materiality Correct Answer Incorrect Answer
    D Convention of consistency Correct Answer Incorrect Answer

    Solution

    Creating a provision for fluctuation in the price of investments means anticipating a possible fall in the value of investments and adjusting accounts accordingly. This follows the: Convention of Conservatism (Prudence) “Anticipate no profits, but provide for all possible losses.” • Potential losses from decrease in investment value are recorded  • Potential gains from increase in value are not recorded Other options do not apply: • Full disclosure → requires clear reporting of all relevant information. • Materiality → focuses on the significance of an item. • Consistency → using the same accounting methods year to year.

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