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Dear John,
I have a question about inventory topic.
Which of the following statements about accounting concepts are correct?
(i) The historical cost concept requires that non-current assets be initially recognised at their purchase cost.
(ii) The accruals concept means that transactions are recognised when the cash is received or paid, not when they actually occur.
(iii) The substance over form convention is that the economic reality of a transaction should be reflected in the financial statements rather than the legal form.
(iv) The prudence concept means it is desirable to understate liabilities in financial statementsA- i and ii
B- iii and iv
C- i and iii
D ii and ivAns : B
My question is, I don’t really understand why (iv) is correct, I thought that under prudence concept, the assets should not be overstated and liabilities should not be understated.
Thank you 🙂
This is nothing to do with ‘inventory topic’ 🙂
(iv) is certainly not correct!
I don’t know where you found this question, but the correct answer is C.
Ehh hahaha sorry about that, I was watching your lecture about inventory, and posting the question about accounting concept at the same time 😀
Got the question from GTG Question Bank.
The answer from the back of the book also states that,
“Statement (i) is not correct because historical cost concept requires that non-current assets be initially recognised at cost. This includes the purchase price, along with other directly attributable costs.”
But, you say that C is the answer, which means statement (i) is correct. Could you please help me explain it more?
Thank you 🙂
Well GTG are being extremely silly.
Historical cost requires that non-current assets should be recognised (shown in the financial statements) initially at the cost of getting them into a useable state. So this includes the purchase price and also things like delivery costs.
However, the total of these would normally be regarded as being the purchase cost (and (ii) and (iv) are certainly wrong 🙂 )
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