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CA Intermediate · Advanced Accounting · AS 2 Valuation of Inventory

Kaveri Textiles Ltd. holds 2,000 metres of finished fabric at 31 March. Cost is ₹180 per metre. The company has a firm sale contract for all 2,000 metres at ₹200 per metre, with selling costs of ₹10 per metre. The general market price of such fabric has fallen to ₹150 per metre. At what amount should the fabric be shown in the balance sheet as per AS 2?

The fabric is valued at ₹3,60,000. Because a firm sale contract exists, net realisable value is the contract price less selling costs, ₹190 per metre, which is above the cost of ₹180. Inventory is carried at the lower figure, cost, so 2,000 metres x ₹180 equals ₹3,60,000.

  1. A₹3,00,000
  2. B₹3,60,000Correct
  3. C₹3,80,000
  4. D₹3,40,000

Explanation

Inventory is valued at lower of cost and net realisable value. NRV is based on the contract price: 200 - 10 = ₹190 per metre, which exceeds cost of ₹180. So value is 2,000 x 180 = ₹3,60,000. Using the market price of ₹150 ignores the firm contract and gives ₹3,00,000, which is wrong.

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