Prudence Concept in Inventory Valuation

Steps:

• Recall that the prudence concept emphasizes caution in accounting to avoid overstating assets or income.
• Identify inventory valuation rules under prudence: assets should not be valued above recoverable amounts.
• Compare cost (historical price) with net realisable value (NRV, estimated selling price minus costs to sell).
• Select the lower value to ensure conservative reporting and prevent potential losses from being ignored.

Why B is correct:

• The prudence concept, as per accounting standards like IAS 2, mandates inventory valuation at the lower of cost and NRV to reflect the most reliable, conservative estimate of value.

Why the others are wrong:

• A: Ignores NRV, risking overstatement if market value falls below cost.
• C: Replacement cost may exceed original cost, violating prudence by potentially overstating inventory.
• D: Revaluation cost is not a standard prudence measure and could lead to subjective overvaluation.

Final answer: B