Question

An examination of the financial statements of Troy Enterprise for the period ended December 31, 2019 revealed that the following transactions and events were recorded as follows:

1. Ending inventory for the year valued using the weighted average method of valuation was stated at cost. The net realizable of the inventory as at December 31, 2019 was Sh. 180,000 lower than its cost.

Required: Determine which accounting assumption or principle (s) if any, have been violated and explain why. For each violation indicate the correct treatment. If you believe the treatment is proper defend your position.      

Answer 1

Solution:

The basic Accounting Convention "Conservatism" define includes book all probable loss when they discoverd.

It means if Inventory value fall below the cost the book the differential loss immediately.

Further, as defined in IFRS / GAAP that "Inventory are measure lower of cost or net reliasable vale"

Measuring of Inventory its cost is violation of Conservatism Principal of accounting as well as it is violation of applicable accounting standard like IFRS / GAAP.

So,

In the question given that Inventory is lower than its cost of 180,000. So it should be measure and recorded at Net realisable value.