CIMA BA3 Syllabus C. PREPARATION OF ACCOUNTS FOR SINGLE ENTITIES - The impact of accounting concepts - Notes ^{18 / 20}

The fundamental accounting assumption of accrual requires costs to be matched with associated revenues.

In order to achieve this, costs incurred for goods which remain unsold at the year end must be carried forward in the statement of financial position and matched against future revenues.

In valuing inventory, we also follow the prudence concept which states that a profit cannot be anticipated before it is realised.

A. If inventory is expected to be sold at a profit:

(i) value at cost
(ii) do not anticipate profit.

B. If inventory is expected to be sold at a loss:

(i) value at net realisable value
(ii) do provide for the future loss