The correct answer is: C. To some extent
The prudence concept is a principle of accounting that requires businesses to be conservative in their estimates and to make provisions for potential losses. This means that businesses may build up reserves or provisions that are higher than the actual amount of loss that they expect to incur. This can be done in order to protect the business from unexpected losses and to ensure that they have sufficient funds to meet their obligations.
However, the prudence concept does not allow businesses to build up reserves or provisions that are unreasonably high. This is because doing so would distort the financial statements and make it difficult for investors and other users of the financial statements to understand the true financial position of the business.
Ultimately, the decision of how much reserve or provision to build up is a matter of judgment for the management of the business. They need to balance the need to be conservative with the need to avoid distorting the financial statements.
Here is a brief explanation of each option:
- A. Yes. This option is incorrect because the prudence concept does not allow businesses to build up reserves or provisions that are unreasonably high.
- B. No. This option is incorrect because the prudence concept does allow businesses to build up reserves or provisions that are higher than the actual amount of loss that they expect to incur.
- C. To some extent. This option is correct because the prudence concept does allow businesses to build up reserves or provisions that are higher than the actual amount of loss that they expect to incur, but it does not allow them to build up reserves or provisions that are unreasonably high.
- D. It depends on the type of business. This option is incorrect because the prudence concept applies to all businesses, regardless of their type.