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- 1 Marks
Question
Why is it important to record the substance of transactions rather than just their legal form in financial statements?
A. Legal principles are often complex and difficult to apply in accounting.
B. Financial statements must comply with tax regulations, not legal principles.
C. The legal form of transactions does not accurately represent their financial impact.
D. Recording transactions based on their legal form is easier and more straightforward.
E. Accountants prefer to use financial substance rather than legal form for simplicity.
Answer
Answer: C
Explanation: The correct answer is C. Recording transactions based on their substance rather than their legal form ensures that the financial statements accurately reflect the financial reality and impact of those transactions. This approach helps present a more truthful picture of a company’s financial position and performance.
- Tags: Accounting principles, Financial Reporting, Substance Over Legal Form
- Level: Level 1
- Topic: Regulatory Environment of Accounting
- Series: MAY 2024
- Uploader: Dotse