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    Question

    A manufacturing firm includes administrative overheads

    and interest costs in inventory valuation during a slowdown. Which accounting principle is violated?
    A Historical cost Correct Answer Incorrect Answer
    B Prudence Correct Answer Incorrect Answer
    C Matching Correct Answer Incorrect Answer
    D Substance over form Correct Answer Incorrect Answer

    Solution

    Inventory must not include abnormal costs like interest or administrative overheads unrelated to production. Including them inflates asset values, violating the prudence concept.

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