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Provision for contingencies are not made in respect of _______ since they do not relate to situation existing at the balance sheet date:
- a)Unspecified business risk
- b)Certain business risk
- c)Specified business risk
- d)Uncertain business risk
Correct answer is option 'A'. Can you explain this answer?
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Provision for contingencies are not made in respect of _______ since t...
Provision for Contingencies:
Provision for contingencies is an amount set aside by a company to cover unforeseen events or losses. It is recorded as a liability on the balance sheet.
Types of Business Risks:
There are two types of business risks:
1. Certain Business Risk: These risks are inevitable and can be easily quantified. For example, depreciation of machinery, increase in the cost of raw materials, etc.
2. Uncertain Business Risk: These risks are unpredictable and cannot be quantified. For example, natural disasters, economic downturns, etc.
Explanation:
The provision for contingencies is made for uncertain business risks that can cause losses to the company. However, provision for contingencies is not made in respect of unspecified business risks since they do not relate to situations existing at the balance sheet date. Unspecified business risks are those risks that are not known at the balance sheet date or cannot be quantified. Therefore, it is not possible to estimate the amount of provision required for such risks.
Conclusion:
Hence, the correct answer is option A, i.e., provision for contingencies is not made in respect of unspecified business risks since they do not relate to situations existing at the balance sheet date.
Provision for contingencies is an amount set aside by a company to cover unforeseen events or losses. It is recorded as a liability on the balance sheet.
Types of Business Risks:
There are two types of business risks:
1. Certain Business Risk: These risks are inevitable and can be easily quantified. For example, depreciation of machinery, increase in the cost of raw materials, etc.
2. Uncertain Business Risk: These risks are unpredictable and cannot be quantified. For example, natural disasters, economic downturns, etc.
Explanation:
The provision for contingencies is made for uncertain business risks that can cause losses to the company. However, provision for contingencies is not made in respect of unspecified business risks since they do not relate to situations existing at the balance sheet date. Unspecified business risks are those risks that are not known at the balance sheet date or cannot be quantified. Therefore, it is not possible to estimate the amount of provision required for such risks.
Conclusion:
Hence, the correct answer is option A, i.e., provision for contingencies is not made in respect of unspecified business risks since they do not relate to situations existing at the balance sheet date.
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Provision for contingencies are not made in respect of _______ since they do not relate to situation existing at the balance sheet date:a)Unspecified business riskb)Certain business riskc)Specified business riskd)Uncertain business riskCorrect answer is option 'A'. Can you explain this answer?
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