- CFA Exams
- CFA Level I Exam
- Topic 4. Financial Statement Analysis
- Learning Module 6. Analysis of Inventories
- Subject 1. Inventory Valuation
CFA Practice Question
"Valuation of inventory at the lower of cost or market" abandons which of the following accounting principles?
B. Consistency
C. Conservatism
A. Historical cost
B. Consistency
C. Conservatism
Correct Answer: A
The general rule is that the historical cost principle is abandoned when the future utility (revenue-producing ability) of the asset is no longer as great as its original cost.
User Contributed Comments 7
| User | Comment |
|---|---|
| quincy | remember this |
| danlan | I think it reflects the conservatism. |
| danlan | It abandons historical cost and reflects conservatism, check question 5 also. |
| UUchi | aha nice danlan i was confused :-) |
| cong | Under IAS, inventory is valued at the minimum of (historical cost, net realizable value). Under GAAP, inventory is valued at the minimum of (historical, market cost). Reversal is possible but subejct to the original write-down value under IAS and prohibited under GAPP. |
| gill15 | If LCM is valued at lower of historical cost or market, how is it that it abandons the historical cost principle? It's using it? Maybe because if the market value is lower than it will abandon the historical cost and use the market value? |
| Shaan23 | That does seem odd. Cost is historical |