[amp_mcq option1=”The going concern concept” option2=”The separate entity concept” option3=”The prudence concept” option4=”Matching concept” correct=”option3″]
The correct answer is C. The prudence concept.
The prudence concept is a fundamental accounting concept that requires businesses to use caution in their financial reporting. This means that businesses should not overstate their assets or income, and should instead err on the side of caution when making estimates.
The use of ‘lower of cost and net realisable value’ for the purpose of inventory valuation is an example of the prudence concept in action. This means that businesses should value their inventory at the lower of its cost or its estimated selling price less the costs of completion and disposal. This ensures that businesses do not overstate their assets, and that their financial statements are prepared on a conservative basis.
The other options are incorrect.
- The going concern concept is the assumption that a business will continue to operate for the foreseeable future. This means that businesses should not prepare their financial statements on the basis that they are going to close down in the near future.
- The separate entity concept is the assumption that a business is a separate entity from its owners. This means that the financial statements of a business should not include the personal assets and liabilities of its owners.
- The matching concept is the principle that expenses should be matched with the revenues they generate. This means that businesses should recognize expenses in the same period as the revenues they generate.