Conservatism Principle in Inventory Valuation

Steps:

• Inventory cost includes purchase and preparation expenses.
• Net realizable value (NRV) is estimated selling price minus completion and selling costs.
• Compare cost to NRV; use the lower value for balance sheet reporting.
• This ensures assets reflect recoverable amounts, avoiding inflated figures.

Why D is correct:

• Under the conservatism principle (GAAP/IFRS), lower of cost or NRV prevents overstating ending inventory, which would inflate cost of goods sold subtraction and thus net income.

Why the others are wrong:

• A: Avoids overvaluing but specifically targets profit overstatement, not general overvaluation.
• B: Historic cost principle records at original cost, but this rule allows write-downs below cost.
• C: Materiality concerns item significance for decisions, unrelated to valuation method.

Final answer: D