Match each inventory accounting treatment or rule on the left with its corresponding financial statement impact or accounting principle on the right.
- Valuation of inventory at the lower of cost and net realizable valueApplication of the Prudence convention to avoid overstating profits and assets
- Crediting closing inventory to the Trading AccountDeduction from cost of goods available for sale to arrive at Cost of Goods Sold
- Presenting closing inventory as a Current Asset in the Balance SheetRepresentation of unsold stock as a short-term asset owned by the business
- Overstatement of closing inventory figure at year-endUnderstatement of Cost of Goods Sold, leading to overstated Gross Profit
Answer
The correct matches pair inventory accounting principles and treatments with their appropriate financial statement effects: (1) Valuing inventory at lower of cost and NRV aligns with the Prudence convention. (2) Crediting closing inventory in the Trading Account reduces cost of goods available for sale to calculate Cost of Goods Sold. (3) Recording closing inventory as a Current Asset reflects short-term resources held at year-end. (4) Overstating closing inventory understates Cost of Goods Sold and overstates profit.
Each inventory accounting rule correctly corresponds to its underlying concept or presentation effect in the final accounts: lower of cost and NRV embodies Prudence; crediting the Trading Account determines Cost of Goods Sold; Balance Sheet inclusion reflects Current Assets; and overstatement of stock artificially inflates profits.
Step-by-Step Solution
Key Concept
Valuation and Treatment of Inventory in Final Accounts