Question

what is a reason that a company would depart from the historical cost principle? select answer from the options below the future utility of the inventory has increased. less bookkeeping is required when using alternate methods. inventory has declined in value below its original cost. a change in business strategy triggers new inventory valuation procedures.

Answer 1

A company may depart from the historical cost principle due to a decline in the market value of inventory. This ensures that financial statements accurately reflect the present discounted value of the assets and are in line with the company's current business strategy.

Step-by-step explanation:

A company might depart from the historical cost principle because inventory has declined in value below its original cost. When the future utility or market value of inventory diminishes, it no longer makes sense to value it at the original cost. Adhering to the historical cost principle under these circumstances could lead to financial statements that overstate the value of the inventory and mislead investors and other stakeholders about the financial health of the company. Therefore, adjusting the valuation method to reflect a decline in market value ensures that the financial statements provide a realistic view of the company's assets.

Utilizing alternative valuation methods better represents the present discounted value of the inventory, aligning the book value with the expected future benefits that the inventory will provide. Moreover, when a company changes its business strategy, it may also trigger a reassessment of inventory valuation methods to ensure they align with new strategic objectives.