The accounting concepts which provide the base for recognition of the lower of either cost or net realizablevalue of inventory as the value of inventory are,(1) materiality and matching concepts (2) matching and timely concepts(3) prudence and realization concepts (4) prudence and historical cost concepts(5) prudence and matching concepts
Question
The accounting concepts which provide the base for recognition of the lower of either cost or net realizablevalue of inventory as the value of inventory are,(1) materiality and matching concepts (2) matching and timely concepts(3) prudence and realization concepts (4) prudence and historical cost concepts(5) prudence and matching concepts
Solution
The accounting concepts that provide the base for recognition of the lower of either cost or net realizable value of inventory as the value of inventory are (3) prudence and realization concepts.
Here's why:
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Prudence Concept: This concept advises that the conditions of uncertainty should be resolved by recording the least favorable outcome. This means that when in doubt, the accountant should choose the solution that will least overstate assets and income, and/or least understate liabilities and expenses. In the context of inventory valuation, this means choosing the lower of cost or net realizable value.
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Realization Concept: This concept states that revenue should only be recognized once it is realized or realizable. In the context of inventory, this means that the value of the inventory should be the amount that can be realized from its sale, i.e., the net realizable value. If this value is lower than the cost, then according to the prudence concept, this lower value should be chosen.
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