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CA Foundation · Accounting · Inventories

Between the balance sheet date and the date of approving the financial statements, a firm sells goods held in closing stock at a price well below their cost. This sale price is evidence of conditions existing at the balance sheet date. How is the closing stock affected?

Closing stock is written down to net realisable value. AS 2 says NRV estimates consider events after the balance sheet date that confirm conditions existing at that date, so a sale well below cost shows the stock's NRV was lower than cost at year end.

  1. ANo adjustment, as the sale occurred after the year end
  2. BStock is written down to NRV based on this evidenceCorrect
  3. CStock is revalued at the original selling price
  4. DStock is shown at cost and a loss is recorded next year

Explanation

Under AS 2, estimates of NRV take into account events after the balance sheet date to the extent they confirm conditions existing at that date. A low post-year-end sale price therefore indicates NRV is below cost, so stock is written down to NRV at year end. Ignoring it would overstate stock and profit.

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