Provisions are established to cover____________?
Show answer Hide answer
Answer: B. Known Liabilities
Explanation
Provisions are set aside out of profits to cover known liabilities of uncertain amounts. Known liabilities whose exact timing or financial magnitude is uncertain require provisions. Prudence dictates establishing provisions for liabilities that are known to exist. Provisions represent estimated liabilities recognized under accrual accounting rules. Common examples include provisions for warranty claims and doubtful customer debts. They differ from contingent liabilities which represent possible obligations from past events.
Businesses establish provisions to ensure financial statements reflect potential future obligations. Auditors review estimation methods to verify that provisions are neither excessive nor deficient. Proper provisioning protects companies from unexpected financial shocks during fiscal periods. Unknown liabilities cannot be provided for because their existence is completely unforeseen. Secret reserves involve hidden profit retention rather than formal liability provisioning. Not all three options are correct because provisions target known rather than unknown debts.
- Subject
- Accounting and Finance
- Category
- Accounting
- Topic
- —
- Difficulty
- medium
Related questions
Q1. The purchase journal is maintained to log_____________?
Show answer Hide answer
Answer: B. All credit purchases of goods
The purchase journal is a specialized book dedicated exclusively to recording credit purchases of goods. Transactions involving the acquisition of merchandise on credit are logged in this journal. Cash purchases and non-...
Q2. Settling business expenses will ______ total assets
Show answer Hide answer
Answer: B. Reduce
Paying business expenses requires an outflow of cash or assets which reduces total assets. Settling obligations and operational expenses diminishes the overall resource pool of the firm. Asset balances decrease when fund...
Q3. The primary accounting frameworks are _____________?
Show answer Hide answer
Answer: A. Two
The fundamental accounting equation and system primarily rests upon two core frameworks for recording transactions. These two primary approaches are the traditional Anglo-American approach and the modern accounting equat...
Q4. Property, Plant, and Equipment are standardly reported on the Balance Sheet at _________?
Show answer Hide answer
Answer: C. Historical cost – Depreciation portion thereof
Property, Plant, and Equipment are reported on the balance sheet at their historical acquisition cost. To reflect wear and tear over time, the historical cost is reduced by the accumulated depreciation portion. This net...
Q5. At what point in time is revenue typically considered realized and earned?
Show answer Hide answer
Answer: A. sale is effected
Revenue is traditionally considered realized and earned when the sale is effected. The earnings process is substantially complete and legal title transfers upon sale completion. Realization occurs when goods are delivere...
Q6. Real accounts comprise assets, liabilities, and ___________?
Show answer Hide answer
Answer: C. Capital
Real accounts encompass all asset and liability accounts that persist across multiple accounting periods. Capital represents the owner's equity component, which is intrinsically linked to the net asset structure. Togethe...