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CMA Foundation · Fundamentals of Financial and Cost Accounting · Four Frameworks of Accounting and Forms of Organization

At year end, Nair Electronics holds an item of stock that cost ₹50,000. Its net realisable value is ₹42,000, and its replacement cost is ₹55,000. Following the convention of conservatism, at what value should the item be shown in the closing stock?

The item should be shown at ₹42,000. Under conservatism, closing stock is valued at the lower of cost (₹50,000) and net realisable value (₹42,000), so the expected loss of ₹8,000 is recognised now. Replacement cost does not affect this comparison.

  1. A₹55,000
  2. B₹46,000
  3. C₹42,000Correct
  4. D₹50,000

Explanation

Stock is valued at the lower of cost and net realisable value. Cost is ₹50,000 and NRV is ₹42,000, so the lower figure is ₹42,000. Replacement cost of ₹55,000 is not the basis here, and an average of the two figures is not a recognised method.

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