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Question
In stock valuation, application of the principle 'at cost price or market price whichever is lower' will result in the valuation of stock sometimes at cost price and at other times at market price. This is an application of the principle of __________.
In stock valuation, application of the principle 'at cost price or market price whichever is lower' will result in the valuation of stock sometimes at cost price and at other times at market price. This is an application of the principle of __________.
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Solution
The correct option is D Conservatism
The principle of conservatism is suitably applicable to the LCM rule.Conservatism in accounting means that one should choose accounting methods that are least likely to overstate assets and income. Valuing inventory at cost when its replacement cost is lower overstated the asset merchandise inventory.Thus, we apply conservatism principle and use LCM to reduce inventory to a more realistic value and, at the same time, recognise the loss in value that has incurred.
The principle of conservatism is suitably applicable to the LCM rule.
Conservatism in accounting means that one should choose accounting methods that are least likely to overstate assets and income. Valuing inventory at cost when its replacement cost is lower overstated the asset merchandise inventory.
Thus, we apply conservatism principle and use LCM to reduce inventory to a more realistic value and, at the same time, recognise the loss in value that has incurred.
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