Question

Using "lower of cost and net realisable value (Market Value)" for the purpose of inventory valuation is the implementation of which of the following concepts?

• A. The going concern concept
• B. The separate entity concept
• C. The prudence concept
• D. Matching concept

Answer 1

The correct option is C The prudence concept

This is the case of the conservatism convention, which is based on "playing safe". The prudence concepts defines that, we should not overestimate the revenues and underestimates the expenses. It is an accounting principle which assumes that, the expenses and losses are to be recorded as soon as they occurs, but the revenues and assets are only to be recorded when they are actually recognized.