Conservatism Principle in Inventory Valuation

Steps:

• Inventory is an asset recorded at cost initially.
• Net realisable value (NRV) is the estimated selling price minus completion and selling costs.
• If NRV falls below cost, value inventory at NRV to reflect potential losses.
• This prevents inflating assets and profits in financial statements.

Why B is correct:

• Under IAS 2, the lower of cost or NRV rule ensures conservatism, avoiding overstatement of current assets (inventory) and profit (by recognizing impairment losses immediately).

Why the others are wrong:

• A: Ignores profit impact, as lower valuation reduces reported earnings.
• C: Rule prevents understating by writing down, not up, and doesn't directly affect sales.
• D: Rule avoids understating by ensuring losses are recognized, not by inflating values.

Final answer: B