Q.The rule of accounting principles is :

The 'cost or market price whichever is lower' rule for stock follows the convention of Conservatism (Prudence), so the answer is option (c).

Why conservatism?

• The convention of conservatism says: anticipate no profit, but provide for all possible losses.
• If market value falls below cost, the fall is a probable loss, so stock is shown at the lower market value. If market value rises above cost, the extra is only an anticipated (unrealised) profit, so it is ignored and stock stays at cost.

Why not the others? …

The Objectivity (verifiable objective evidence) concept is the relevant accounting principle here.

The Objectivity principle (also called Verifiable Objective Evidence concept) states that accounting transactions should be recorded in an objective manner, free from personal bias, and supported by verifiable documentary evidence such as invoices, receipts and vouchers. This ensu …

Financial statements are based on recorded facts (from the books of account).

Financial statements (the Trading and Profit & Loss Account, and the Balance Sheet) are prepared using the recorded facts of transactions already entered in the journal and ledger, combined with accounting conventions, concepts and some personal judgements (e.g. estimating useful life f …