Valuing inventory at cost or net realizable value is based on which principle?
Conservatism
The correct answer is option 2. The principle of conservatism dictates that inventory should be valued at the lower of cost or net realizable value, ensuring that potential losses are recognized rather than gains. The other principles are not directly related to inventory valuation: going concern relates to the assumption that a business will continue operating, consistency involves applying accounting methods consistently, and historical cost is an accounting principle for recording assets at their original cost.
Important Questions from Inventory
Which of the following statements is/are correct?
Statement-1: In periods of rising prices, the cost of production is lower in the FIFO method.
Statement-2: In periods of falling prices, the ending inventory is valued in the FIFO method at a price lower than that in case of the LIFO method.
Which of the following methods does NOT consider historical cost of inventory?
Under ______ method of Inventory valuation, the issues of materials are made at the price of materials or goods which have been ordered but not yet received.
In periods of rising prices, _____ method of inventory valuation will result in production being relatively undercharged.
If a firm purchases 100 units of goods on 1st Jan. @ Rs 4 p.u; 200 units on 8th Jan. @ Rs.5 p.u, 200 units on 24th Jan. @ Rs.6 p.u, and sold 200 units on 31st Jan, what will be the value of inventory sold on 31st Jan. according to the Weighted Price method when the firm follows Periodic Inventory System?
