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IAI Actuarial Core Principles · Business Finance · Construction and features of company accounts and reports

A company's inventory cost Rs 8,00,000 and, at the year end, can be sold for Rs 9,50,000 less selling costs of Rs 1,70,000. Applying the prudence-based rule for valuing inventory, at what amount should it be reported?

Inventory should be reported at Rs 7,80,000. It is valued at the lower of cost, Rs 8,00,000, and net realisable value, which is Rs 9,50,000 less Rs 1,70,000 selling costs, giving Rs 7,80,000.

  1. ARs 9,50,000
  2. BRs 8,00,000
  3. CRs 7,80,000Correct
  4. DRs 1,70,000
  5. Rs 9,60,000

Explanation

Inventory is stated at the lower of cost and net realisable value. NRV = 9,50,000 - 1,70,000 = 7,80,000, which is below cost of 8,00,000, so a write-down of Rs 20,000 is made. Reporting cost ignores the loss; using selling price ignores the selling costs.

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