A business owner values inventory at its selling price rather than its cost price. Which accounting concept is being violated?
Question 1 Report
A business owner values inventory at its selling price rather than its cost price. Which accounting concept is being violated?
Answer Details
The correct answer is Prudence.
The prudence concept requires that inventory is valued at the lower of cost and net realisable value. Valuing inventory at its selling price rather than its cost would overstate assets and anticipate profits that have not yet been realised through an actual sale. The profit on inventory should only be recognised when the goods are sold, not before.
Going concern assumes the business will continue operating but does not prescribe inventory valuation rules. Consistency requires the same methods to be used each period. Business entity separates the owner's affairs from the business. None of these directly address the prohibition on valuing inventory above cost.
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