ACCA Applied Knowledge · Financial Accounting · Qualitative characteristics of useful financial information

Which of the following is an example of the application of prudence, as the Conceptual Framework now describes it, without introducing bias?

Writing inventory down to net realisable value when that is below cost applies prudence properly. It recognises an expected loss with caution but without bias. Creating secret reserves or recognising all expected gains would breach neutrality and faithful representation.

1. ACreating a secret reserve by overstating a provision in a profitable year to reduce profit
2. BWriting inventory down to net realisable value when its expected selling price less costs to sell is below costCorrect
3. CNever recognising any provisions to avoid overstating liabilities
4. DRecognising all expected future gains immediately in profit or loss