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

A firm values closing stock at Rs 2,40,000 on 31 March using the cost or NRV, whichever is lower, rule. The stock consists of two items. Item A has cost Rs 1,50,000 and NRV Rs 1,30,000. Item B has cost Rs 90,000 and NRV Rs 1,20,000. Assuming the rule is applied item by item, the opening profit before this valuation was Rs 5,00,000, computed on stock at cost. What is the profit after the correct valuation?

Profit is Rs 4,80,000. Applied item by item, the lower of cost and NRV gives Rs 1,30,000 for item A and Rs 90,000 for item B, so stock is Rs 2,20,000. That is Rs 20,000 below cost, so profit falls by Rs 20,000. Item B's higher NRV is not recognised.

  1. ARs 5,00,000
  2. BRs 4,80,000Correct
  3. CRs 5,30,000
  4. DRs 5,20,000

Explanation

Item A is valued at NRV of Rs 1,30,000 and item B at cost of Rs 90,000, so the correct stock is Rs 2,20,000. This is Rs 20,000 lower than the cost figure of Rs 2,40,000, so profit falls to 5,00,000 - 20,000 = Rs 4,80,000. Offsetting item B's gain against item A's loss would leave stock unchanged, which is wrong when the rule is applied item by item.

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