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CA Intermediate · Advanced Accounting · Introduction to Accounting Standards

Mehta Traders Ltd. purchased goods for Rs 5,00,000 and at year end the realisable value of part of the stock is lower than cost. Management wants to keep the inventory at cost to show higher profit, since the fall is considered temporary. Which fundamental accounting consideration, as laid out in AS 1, is mainly violated if the loss is ignored?

Prudence is violated. AS 1 requires that provision be made for all known liabilities and losses even if the amount cannot be determined with certainty, and anticipated losses be recognised. Keeping inventory at cost despite lower realisable value overstates profit, whereas the other considerations are not engaged.

  1. APrudence, as a probable loss is not provided forCorrect
  2. BGoing concern, as the business is about to close
  3. CConsistency, as policy has been changed
  4. DAccrual, as revenue has been recognised late

Explanation

AS 1 lists prudence, substance over form and materiality as the major considerations. Ignoring a probable fall in value overstates profit, contrary to prudence, which requires provision for anticipated losses. No policy change or closure is indicated, so consistency and going concern are not the issue.

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