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CMA Intermediate · Financial Accounting · Accounting Fundamentals

Gupta Traders values closing stock at cost Rs 60,000, whereas its net realisable value is Rs 52,000. Under the convention of conservatism and the AS 2 lower-of-cost-or-NRV rule, at what amount should closing stock be shown, and what is the effect on profit compared with valuing at cost?

Closing stock is shown at Rs 52,000, the lower of cost Rs 60,000 and net realisable value Rs 52,000, under conservatism. Because closing stock is Rs 8,000 lower, cost of goods sold rises and profit is Rs 8,000 lower than with cost valuation.

  1. ARs 52,000; profit lower by Rs 8,000Correct
  2. BRs 60,000; profit unchanged
  3. CRs 52,000; profit higher by Rs 8,000
  4. DRs 60,000; profit lower by Rs 8,000

Explanation

Stock is valued at the lower of cost (60,000) and NRV (52,000), so 52,000. Closing stock is smaller by 8,000 than at cost, so cost of goods sold rises and profit falls by 8,000. Showing it at cost ignores anticipated loss.

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