91Ó°ÊÓ

In inventory accounting, four principles or concepts must be followed. These are –

a) Consistency principle

b) Disclosure principle

c) Materiality concept

d) Conservatism

These principles govern inventory accounting and standards.

In the given case, the principle of conservatism has been used. Per this principle, reporting of figures should be relevant and be at the reduced value and not on overstated value.

The inventory’s market value has been lowered by a significant amount and become lower than the historical cost. In this situation, there would be a loss for every sale because the cost would be higher than the market value. So, per the conservatism principle, this loss must be recognized by COGS, and the ending inventory would be reported at a lower of cost and net realizable value.