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CA Foundation · Accounting · Final Accounts of Sole Proprietors

Closing stock of a firm is valued at Rs 1,20,000 cost, whereas its net realisable value is Rs 1,05,000. At what value should closing stock be shown in the Trading Account and what is the effect on gross profit compared with using cost?

Closing stock is shown at Rs 1,05,000 because stock is valued at the lower of cost and net realisable value. The lower closing stock raises cost of goods sold, so gross profit is Rs 15,000 lower than it would be at cost.

  1. ARs 1,05,000; gross profit is lower by Rs 15,000Correct
  2. BRs 1,20,000; gross profit is unchanged
  3. CRs 1,05,000; gross profit is higher by Rs 15,000
  4. DRs 1,20,000; gross profit is lower by Rs 15,000

Explanation

Stock is valued at lower of cost and net realisable value, so Rs 1,05,000 is used. A lower closing stock increases cost of goods sold by Rs 15,000, so gross profit falls by Rs 15,000.

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