CA Foundation · Accounting · Theoretical Framework
Iyer Traders has 400 units of an item in stock at year-end. Cost per unit is ₹120 and the net realisable value per unit is ₹105. Under the convention of conservatism, at what value should the closing stock of this item be shown?
Closing stock should be shown at ₹42,000. Under conservatism, stock is valued at the lower of cost (₹120) and net realisable value (₹105), so 400 units × ₹105 equals ₹42,000. Valuing at cost would ignore the expected loss.
- A₹42,000Correct
- B₹48,000
- C₹45,000
- D₹50,400
Explanation
Conservatism, applied through the rule of lower of cost and net realisable value, requires valuing stock at the lower figure. The lower value is ₹105, so 400 × 105 = ₹42,000. Using cost gives ₹48,000, which would overstate profit by anticipating a loss that is not recognised.
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