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In the cost principle the valuation of assets or inventory is based on cost i.e. depreciation is calculated on the cost value of the asset.
If a company has buildings, equipment and inventory, the cost principle will mean that the amount of depreciation expense and the cost of goods sold expense will be based on the costs when the assets were acquired. If these assets have increased in value, the depreciation and cost of goods sold reported on the income statement will be less than the value of the economic capacity being used up. As a result, the reported net income will be greater than the economic reality.
If a company has a buildings, equipment or inventory amount of depreciation expense and the cost of gold sold that it depends on the asset that they have.
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