A firm holds a stock which is heavily in demand. Consequently, the market value of this stock may be increasing. Normal accounting procedure would ignore this. Which concept covers this?
Note: Stock is always measured at lower of cost at which goods were purchased and the current price of those goods. (We'll study this later)
Conservatism
"Stock is always measured at lower of cost at which goods were purchased and the current price of those goods". This is due to conservatism.
Conservatism is all about playing it safe or taking the less risky approach towards accounting. Since the stock is heavily in demand, the market price might be increasing as compared to the current one. We consider the lower cost of the alternatives. Hence, this increase in the price would be ignored.