Illustrate with an example how faithful representation concept/assumption may be applied to accounting for inventory.

Expert Solution

Faithful Representation Concept means Substance over form. Under this accounting should be done as per the substance of the tranasction which means " economic reality" rather than legal recording basis.

For eg: ABC agreed to sell the product at higher rate for a particular period just to inflate the top line, It means inventory goes out, but same amount of money is returned with extra cost over the purchase of the same good. It means Sale is inflated in ABC company and another party increase the purchase cost. this is the legal document form.

But actually , Sale of material is made just to finance the company and later on same is purchased at higher amount after a particular tenure. It means that purchase is made simply returning of money lended by way of sale and extra margins is in the form of finance cost to the ABC company.

Here, this technique is used for mark up the financial statements. But as per accounting standards these strategy are bifuracated under " Faithful Concept"

ekkarill92 answered 2 years ago

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