Excluding obsolete inventory reflects cautious valuation

Steps:

• Identify the practice: Business writes down inventory over one year old due to obsolescence risk.
• Recall key principles: Accounting principles guide asset valuation, emphasizing reliability and caution.
• Match to prudence: This principle requires conservative estimates to avoid overstating assets.
• Eliminate mismatches: Other principles address continuity, original cost, or revenue timing, not caution in uncertainty.

Why C is correct:

• Prudence (conservatism) dictates understating assets like inventory when potential losses from obsolescence exist, ensuring financial statements do not overstate value.

Why the others are wrong:

• A: Going concern assumes the business will continue operating indefinitely, unrelated to inventory write-downs.
• B: Historical cost records assets at original purchase price, but here value is reduced below cost.
• D: Realisation focuses on recognizing revenue only when earned and realizable, not on inventory valuation.

Final answer: C