Skip to content

CS Executive · Corporate Accounting and Financial Management · Introduction to Corporate Accounting

At the year end, Bhatia Industries held inventory with cost ₹3,60,000 and estimated net realisable value ₹3,20,000. A customer had also verbally promised a large order next year, expected to yield a profit of ₹50,000. Following the convention of conservatism (prudence), what is the effect on the year's profit?

Profit is reduced by ₹40,000 and the expected ₹50,000 profit is ignored. Conservatism requires providing for anticipated losses, here inventory valued at the lower NRV of ₹3,20,000 against cost ₹3,60,000, while not recognising profits until they are realised or reasonably certain.

  1. AProfit reduced by ₹40,000 and the expected ₹50,000 profit not recognisedCorrect
  2. BProfit reduced by ₹40,000 and the ₹50,000 profit recognised
  3. CProfit increased by ₹10,000 being the net of both items
  4. DNo effect on profit as both are future matters

Explanation

Inventory is valued at the lower of cost and NRV, so the write-down is 3,60,000 − 3,20,000 = ₹40,000, charged to profit. Prudence forbids anticipating profit, so the ₹50,000 expected from an unconfirmed order is ignored. Netting the two would wrongly recognise an unearned gain.

Did you get it right without looking?

One question tells you little. A timed set on Introduction to Corporate Accounting shows your real accuracy, how long you take and where you lose marks.

Practise Introduction to Corporate AccountingFree diagnostic mock

More Introduction to Corporate Accounting questions