An investment company has been valuing its value of land less than the market price or cost. It now wants to value it's inventory at current price which is higher than the cost. Which concept is violated here?

Question

Answer

Violation of Historical Cost Concept

Explanation of Historical Cost Concept

Historical cost concept is an accounting principle that requires companies to record assets at their original or nominal cost when acquired. The cost is recorded as an asset in the balance sheet and remains unchanged until the asset is sold or disposed of.

Violation of Historical Cost Concept

The investment company's decision to value its inventory at the current market price, which is higher than the cost, violates the historical cost concept. This concept requires that assets be recorded at their historical cost, which is the amount paid to acquire them, and not at their current market value.

Reason for Violation

The investment company has been undervaluing its land in the balance sheet by valuing it at less than its market price or cost. This undervaluation of assets has created a situation where the company's balance sheet does not reflect its true financial position, and it may be difficult for investors and stakeholders to make informed decisions based on inaccurate financial information.

Impact of Violation

The decision to value inventory at the current market price can have a significant impact on the company's financial statements. The company's assets, equity, and net income will increase, and it will appear to be more profitable than it actually is. This can mislead investors and stakeholders and create a false impression of the company's financial health.

Conclusion

The historical cost concept is an essential accounting principle that ensures that financial statements are consistent and reliable. The investment company's decision to value its inventory at the current market price violates this concept and can have a significant impact on its financial statements. The company should follow the historical cost concept and record its assets at their original cost to provide accurate and reliable financial information to its stakeholders.

Answer

Prudence concept is being violated here

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