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CA Intermediate · Advanced Accounting · Framework for Preparation and Presentation of Financial Statements

Kaveri Textiles Ltd. has a stock of finished cloth costing ₹8,00,000. Due to a fall in demand, the net amount it expects to realise from the cloth is only ₹6,50,000. The accountant records the stock at ₹6,50,000 and charges the ₹1,50,000 difference to the Statement of Profit and Loss in the current year. Which qualitative characteristic or concept of the Framework is most directly reflected in this treatment?

The treatment reflects prudence. The expected loss from the fall in net realisable value is recognised immediately by writing stock down from ₹8,00,000 to ₹6,50,000, whereas any possible gain would not be anticipated. Going concern and accrual do not explain a write-down of inventory.

  1. APrudence, by recognising the expected loss but not anticipating gainsCorrect
  2. BGoing concern, by assuming the business will continue
  3. CAccrual, by recording revenue when cash is received
  4. DMateriality, by ignoring small items of loss

Explanation

Writing stock down to net realisable value recognises an expected loss in advance, while gains are not anticipated. This is the application of prudence. Going concern concerns continuity of the entity and accrual concerns timing of recognition, neither of which explains the write-down.

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