GAAP_Prudence 一般公认会计原则

GAAP - Prudence
This discussion focuses on the objectives, description and application of this principle. Examples will be given to strengthen the understanding and capability to apply this principle at real situation.
Objective:
To lead managers to anticipate or disclose losses and liabilities, but it does not allow a similar action for gains and assets.
“Anticipate no profits, but anticipate all losses”
Description:
This accounting principle states that if doubt exists between two acceptable alternatives, the manager should choose the alternative that will result in a lesser asset amount and/or a lesser profit. However, it does not mean understating assets or income. Application:
If a situation arises where there are two acceptable alternatives for reporting an item, prudence directs the management to choose the alternative that will result in less net income and/or less asset amount.
Example:
Under lower-of-cost-or-market (LCM) method, inventory is reported at the lower of its cost or market value, which results in higher cost of goods sold and lower net income. Thus net income and assets are reported at their lowest reasonable amount.
Cost of goods sold = Beginning inventory + purchase – Ending inventory
Net income = Sales – Cost of goods sold – other expenses (operating and non-operating) By using LCM, the inventory is reported at either the cost or market value, whichever is lower, assuming the other factors remain unchanged.
Cost of goods sold = Beginning inventory + purchase – Ending inventory
Finally, the higher Cost of goods sold leads a lower amount of net income, also assuming the other factors remain unchanged.
Net income = Sales – Cost of goods sold – other expenses (operating and non-operating)
Another example on prudent accounting practice is the practice of accelerated depreciation method. This method results in earlier recording of expense or later recording of revenue. It effects in the postponing on the report of net income and therefore is conservative.
Example 2:
At the beginning of the year, Southwest purchased equipment for $62,500 cash. The equipment has an estimated useful life of 3 years and an estimated residual value of $2,500. Southwest uses Double-declining method (accelerated depreciation) to calculate the depreciation expense.
Entries:
Recording Depreciation expense for the first year
Dr Depreciation Expense $41,667 (Note 1)
Cr Accumulated Depreciation $41,667
Note 1:
Annual Depreciation expense = Net book value x (2/useful life in years)
$41,667 = $62,500 x (2/3 years)
Recording Depreciation expense for the second year
Dr Depreciation Expense $13,889 (Note 2)
Cr Accumulated Depreciation $13,889
Note 2:
Annual Depreciation expense = Net book value x (2/useful life in years)
$13,889 = $(62,500 – 41,667) x (2/3 years)
Final comment:
Managers are always optimists. Without any constraints, this optimism could find its way into the company’s reported assets and profits. Managers may try to present too favorable a view of the company, and to show a better performance of them than it actually was. However, by so doing, this may result in an overstating of the assets and net income, and mislead the outsiders.。