Question

Many current assets are not shown at historic cost in the financial statements. For example, inventories...

Many current assets are not shown at historic cost in the financial statements. For example, inventories are usually shown at the “lower of cost or market.” What concepts or conventions warrant this practice?

Homework Answers

Answer #1

The rule lower of cost or market is derived from the conservatism principle. It instructs in providing all expected losses but not recognizing incomes unless it is certain to receive.

Furthermore, current assets are expected to realize within the next 12 month, hence, it's better to reflect their market value in financial statements.

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