Commercial Applications
Assertion (A): According to the Prudence Principle, the valuation of Closing Stock is based on either its cost price or its net realizable value, whichever is lower.
Reason (R): This practice ensures that a business firm does not present a more favourable financial position than what it actually is.
- A is true but R is false
- A is false but R is true
- Both A and R are true and R explains A.
- Both A and R are true but R does not explain A.
GAAP
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Answer
Both A and R are true and R explains A.
Reason — Both statements are true. The Prudence (Conservatism) Principle requires recording all anticipated losses but ignoring all anticipated gains. Valuing closing stock at cost price or market price (whichever is lower) is a direct application of this principle, ensuring that profits and assets are not overstated and the firm does not show a more favourable financial position than the actual one.
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