Conservatism A local disk jockey for FM radio station WFSS, while helping to clean the attic of a record store that was going out of business, found five unopened copies of what appeared to be the first album released by Billy Joel. She purchased the records for a total of $40. Later in the day, she sold one of the records to a friend who is a Billy Joel fanatic for $25. The following week she auctioned off one of the records on the air for $375 after announcing that all proceeds would go to a neighborhood well-baby clinic. If she were preparing financial statements in accordance with generally accepted accounting principles, the concept of conservatism might be relevant in assigning a value to the remaining three records, which she believes are worth a minimum of $750.

a. Define the concept of conservatism and explain why it is used in the financial reporting process.

b. In this situation, what different methods might be used to assign a value to the remaining records? At what amount would the records be valued under a strict interpretation of conservatism?