On account of ______ convention, the inventory is valued 'at cost or market price whichever is less'.
Conservatism
The correct answer is option 2. The convention of conservatism in accounting advises that when there is a choice between two valuations for inventory (cost or market price), the lower value should be chosen. This principle ensures that assets are not overvalued in the financial statements.
Important Questions from Basic accounting principles
The generally acceptable accounting principles (GAAP) fulfill the conditions of
(i) Relevance
(ii) Objectivity
(iii) Feasibility
A firm purchases a piece of land after making full payment to the seller. However, the legal formalities are yet to be completed. According to which principle does the firm record the transaction in its books of accounts though the legal formalities are NOT completed?
Which of the given options best describes the truthfulness of the following statements?
Statement-1: Generally Accepted Accounting Principles (GAAP) is to be followed by companies so that investors have an optimum level of consistency in the financial statements they use when analyzing companies for investment purposes.
Statement-2: Generally Accepted Accounting Principles (GAAP) cover aspects like revenue recognition, balance sheet item classification and outstanding share measurements.
________ convention underlines the prudence of understating rather than over-stating the net income of an entity for a period and the net assets as on a particular date.
______ convention proposes that while accounting for various transactions, only those which may have significant effect on profitability or financial status of the business should have special consideration for reporting.
