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CA Foundation · Accounting · Inventories

Ganesh Motors, a dealer, owns a delivery van used to carry goods to customers and also has 10 cars in showroom for sale. Under AS 2, which treatment is correct at the year end?

The 10 showroom cars are inventories because they are held for sale in the ordinary course of business, whereas the delivery van is a fixed asset because it is held for use in operations over several periods. Classification depends on the purpose for which the asset is held.

  1. ABoth the van and the cars are inventories
  2. BOnly the van is inventory, because it is in use
  3. CNeither the van nor the cars are inventories
  4. DThe 10 cars are inventories; the van is a fixed assetCorrect

Explanation

Cars held for sale in the ordinary course of business are inventories (goods held for sale). The delivery van is held for use in the business over more than one period, so it is a fixed asset and falls under depreciation rules, not AS 2. Treating the van as inventory confuses purpose of holding.

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