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Her statement of financial position will look like this. 

 

 

$    

Assets 

 

Inventory (at cost, ie 2 × $5) 

 

10 

Accounts receivable (18 × $10) 

 

180 

 

 

190 

Capital and liabilities 

 

Proprietor's capital (profit for the period) 

 

 90 

Accounts payable (20 × $5) 

  

100 

 

 

190

 

However, if Emma had decided to give up selling T-shirts, then the going concern assumption no longer 

applies and the value of the two T-shirts in the statement of financial position is break-up valuation not 

cost.  

Similarly, if the two unsold T-shirts are unlikely to be sold at more than their cost of $5 each (say, 

because of damage or a fall in demand) then they should be recorded on the statement of financial 

position at their net realisable value (ie the likely eventual sales price less any expenses incurred to 

make them saleable) rather than cost. This shows the application of the prudence concept. The 

Conceptual Framework 2018 views prudence as a component of neutrality, which is a characteristic of 

faithful representation. Prudence is described as: 

'the exercise of caution when making judgements under conditions of uncertainty. The exercise of 

prudence means that assets and income are not overstated and liabilities and expenses are not 

understated.'   

 

 

 

 

 

 

(Conceptual Framework 2018, para. 2.16) 

As an accountant, it is important to exercise caution when making accounting estimates. 

In this example, the concepts of going concern and accruals are linked. Since the business is assumed 

to be a going concern, it is possible to carry forward the cost of the unsold T-shirts as a charge against 

profits of the next period.