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CMA Foundation · Fundamentals of Financial and Cost Accounting · Accounting Principles, Concepts and Conventions

A company's stock was bought for Rs 1,20,000 and its net realisable value at the year end is Rs 1,05,000. Under AS 2 (Valuation of Inventories), what is the effect on profit of valuing the closing stock correctly, compared with valuing it at cost?

Profit is lower by Rs 15,000. AS 2 requires inventory at the lower of cost and net realisable value, so stock is written down from Rs 1,20,000 to Rs 1,05,000. The lower closing stock increases cost of goods sold and reduces profit by the Rs 15,000 write-down.

  1. AProfit is higher by Rs 15,000
  2. BProfit is lower by Rs 15,000Correct
  3. CProfit is lower by Rs 1,05,000
  4. DProfit is unchanged

Explanation

AS 2 requires inventory at the lower of cost and NRV, so stock is Rs 1,05,000. Closing stock is Rs 15,000 lower than at cost, which raises cost of goods sold and reduces profit by Rs 15,000. Option 'higher' reverses the sign.

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