Under the prudence concept, inventory at the reporting date is generally valued at:
Correct answer: C. The lower of cost and net realisable value
- A. Its original invoice price plus expected profit
- B. The higher of cost and net realisable value
- C. The lower of cost and net realisable value
- D. Its expected selling price without selling costs
Explanation
Prudence avoids overstating assets and profit, so inventory is measured at the lower of cost and net realisable value. The higher value is used only when supported by the applicable reporting framework, not merely because it is higher.
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About Accounting Principles
Accounting principles explain the rules used to record, classify and report business transactions. Coverage includes the accounting equation, double-entry system, accrual and cash bases, matching and prudence concepts, consistency, going concern, business entity, and the difference between capital and revenue items.
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