An example of where the prudence assumption leads to a reduction in the valuation of an asset is:
A)development expenditure capitalised as an asset rather than written off as an expense.
B)taking an upward revaluation of an asset to a reserve rather than including it in the profit calculation.
C)valuing inventory at the lower of cost and net realisable value.
D)All are examples.

Question

Quizplus · Accepted Answer

The prudence assumption requires that assets should not be overstated, therefore, inventory must be valued at the lower of cost and net realisable value to ensure that the value of the inventory is not overstated. This leads to a reduction in the valuation of the asset. A, B, and D are not solely related to the prudence assumption. A is related to the matching principle, B is related to the revaluation model and D includes all options.

An Example of Where the Prudence Assumption Leads to a Reduction