Question

Identify whether the following statements are true or false and give brief reasons to
support your conclusion:
(i) The concept of separate entity is not applicable to a partnership.
(ii) Revenue is not recognized in the period in which it is received.
(iii) In case of fixed assets, fair value is always greater than the historical cost.
(iv) According to IAS-2, inventories may be valued using LIFO, FIFO or weighted
average method.
(v) According to IAS-2, inventory is valued on the basis of cost or current
replacement cost, whichever is less.
(vi) Running finance is a short term liability although it may not be paid in full for
many years.
(vii) Closing stock does not appear in the pre-closing trial balance but appears in the
post-closing trial balance.
(viii) The concept of going concern supposes that the life of business entity will be
more than 15 years.
(ix) When the provision for bad debts is based on age analysis, the opening balance
of provision for doubtful debts is not taken into consideration.
(x) Net realizable value of inventories is equal to selling price.
(xi) In a partnership, profit is always shared in the ratio of capital introduced by each
partner.
(xii) The ‘prudence’ concept allows a business to build substantially higher
reserves/provisions than are actually required. (13)

Answer
(i) False: In accounting, business is considered to be a separate entity from the proprietor and
the concept is applicable to all forms of business organizations.
(ii) True: Revenue is recognized in the period in which it is earned, i.e. when a sale is
effected or service provided irrespective of whether money is received or not.
(iii) False: In view of the continuous and continuing inflation, fair value normally exceeds
historical cost, but this need not always be the case; e.g. due to technological
obsolescence, fair value may be lower than historical cost.
(iv) False: according to IAS-2, inventories may be valued using only FIFO or weighted
average method.
(v) False: Under IAS 2 ‘Inventories’, inventory is valued on the basis of cost price or net
realizable value, whichever is less.
(vi) True: running finance obtained from bank is a short term liability as it is repayable on
demand.
(vii) True: closing stock appears outside the trial balance in pre-closing trial balance but after
passing the closing entries when opening stock and other revenue accounts are closed,
only balance sheet items including closing stocks form part of the post closing trial
balance.
(viii) False: No specific period has been specified. The concept of going concern supposes that
the business is going to continue for the foreseeable future.
(ix) False: the provision is required to arrive at net debtors (as would appear in the balance
sheet) is calculated by age analysis. However, opening balance has to be considered for
making the adjusting entry.
(x) False: net realizable value is equal to selling price less the estimated cost of completion
and the costs necessary to make the sale.
(xi) False: In partnership, partners may share profit in any ratio as may be mutually agreed.

(xii) False: The prudence concept does not allow a business to build excessive
reserves/provisions. However, prudence means the exercise of a degree of caution such
that assets or income are not overstated and liabilities and expenses are not understated.