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Reporting inventory at the lower of cost and net realisable value is an application of which accounting principle?
AThe matching principle
BThe conservatism principle
CThe revenue recognition principle
DThe full disclosure principle
Answer & Solution
Correct answer: B. The conservatism principle
1. Conservatism requires the less favourable of acceptable reporting outcomes to be presented.
2. Writing inventory down when its value falls shows the worst-case figure rather than an inflated one.
3. This protects readers from overstated asset values.
4. Rule out the matching principle, which concerns timing of expenses against revenue, not asset write-downs.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §4.1.3 "Lower of Cost or Net Realisable Value", p.122_
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