Question

The cost principle dictates that companies record assets at their cost. In later periods, however, the fair value of the asset must be used if fair value is higher than its cost.

a true
b false

Answer 1

The cost principle dictates that assets are recorded at their cost, but the fair value must be used if it is higher in later periods.

Step-by-step explanation:

The statement is true. According to the cost principle in accounting, companies are required to record their assets at their original cost. However, in later periods, if the fair value of an asset is higher than its cost, the fair value must be used.

For example, let's say a company purchases a piece of land for $100,000. The land is recorded as an asset on the company's balance sheet at its cost of $100,000. After some time, the fair value of the land increases to $150,000. In this case, the company would need to update the value of the land on its balance sheet to reflect its fair value of $150,000.