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

At year end, Desai Electronics, Vadodara, holds 100 units of an item bought at Rs 500 each. Its net realisable value is Rs 450 per unit. A further 60 units of another item cost Rs 300 each with net realisable value Rs 340 each. Following the convention of conservatism, what is the total closing stock value if the items are valued item by item at lower of cost and NRV?

Closing stock is Rs 63,000. The first item is valued at NRV, 100 x Rs 450 = Rs 45,000, because it is lower than cost. The second is kept at cost, 60 x Rs 300 = Rs 18,000, since unrealised gains are not recognised. Total is Rs 63,000.

  1. ARs 63,000Correct
  2. BRs 68,000
  3. CRs 65,000
  4. DRs 70,000

Explanation

First item: 100 x Rs 450 = Rs 45,000 (NRV lower). Second item: 60 x Rs 300 = Rs 18,000 (cost lower, gain not recognised). Total = Rs 63,000. Rs 68,000 results from using cost for the first item and ignoring the second, no, it comes from 50,000 + 18,000, i.e. ignoring the fall in NRV; Rs 65,000 and Rs 70,000 are not derived from item-wise lower-of-cost-and-NRV.

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