Conservatism And Cost Accounting

Conservatism has been reported to effect financial statements in a number of ways including: earnigs quality, balance sheets, value relevance and on other related factors. It has also been reported that this factor has a considerable impact on all forms of accounting information, decision making of the shareholders and listings on the stock exchange. The impact primarily occurs on quality of information reported in the financial statements which ultimately leads to higher profitability and sustainability for organizations. Other studies have reported that conservatism increases the volume of information that is reported in relevance to securities markets. (Sohn, 2011). At the same time, conservatism is also defined as being the asymmetry in

Most of them are of the view that there are a number of benefits in adopting this principle. One major explanation is that conservatism arises because it is an essential component of the efficient measures and technologies that are employed in organizations and companies (Givoly, Hayn & Natarajan, 2007). Using this explanation, conservative accounting is a mode and means for dealing with problems dealing with asymmetric information and limited liability (Sohn, 2011). Even in those cases where contracting as well as managerial accounting will be separated from accounting and reporting, most of these problems will continue to exist. The contracting measures and explanations have shown that conservatism is quite beneficial when viewed from investor perspectives. In the span of the past few years, shareholder litigation is a core source of conservatism (Sohn, 2011). It should also be noted that shareholder litigation is a strong source of conservatism. Litigation also results in the production of asymmetric payoffs. Keeping these assertions into focus, it can be said that understating the assets of a company results in the reduction of expected costs of litigation (Givoly, Hayn & Natarajan,

Asymmetric recognition of gains as well as losses allows managers of profitable companies and firms in the reduction of present value taxes (Sohn, 2011). Another fact is that standard setters and regulators have a number of their own benefits and incentives for inducing conservative accounting as well as reporting (Sohn, 2011). The importance of conservatism is also evident in the fact that regulators are to be blamed if firms and companies overstate net assets in comparison to the understatement of assets. Moreover, conservatism results in the reduction of political costs that are applied on regulators and trend setters from time to time (Bushman & Piotroski,