Stock is valued at lower of cost or net realisable value (market value).
This is an example of Prudence concept.
But isn't Historical cost concept being violated here????
And also in case of violation of Prudence and Historical Cost Concept , which concept over rules????
Dear Student,
Historical Cost concept states that all assets should be recorded at their original cost and not at their market value. This concept holds an exception to marketable securities, inventories & other current assets whose value keeps on fluctuating and are the part of organisation for a lesser duration.
And concept of prudence states that revenue or assets must not be overstated and liabilities and expenses must not be understated.
So, here its not that Historical concept is violated as it holds certain exceptions mentioned and generally applies for fixed assets. As inventories are current assets and the entity deals with it on regular basis it becomes prudent to record them on its actual realisable value or cost whichever is lower.
There is no such decided rule as to which concept will supercede other, it all depends on situations & related standards.
Regards
Historical Cost concept states that all assets should be recorded at their original cost and not at their market value. This concept holds an exception to marketable securities, inventories & other current assets whose value keeps on fluctuating and are the part of organisation for a lesser duration.
And concept of prudence states that revenue or assets must not be overstated and liabilities and expenses must not be understated.
So, here its not that Historical concept is violated as it holds certain exceptions mentioned and generally applies for fixed assets. As inventories are current assets and the entity deals with it on regular basis it becomes prudent to record them on its actual realisable value or cost whichever is lower.
There is no such decided rule as to which concept will supercede other, it all depends on situations & related standards.
Regards