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CMA Foundation · Fundamentals of Financial and Cost Accounting · Accounting Cycle

Kiran Traders values closing stock at cost Rs 90,000, but its net realisable value is Rs 80,000. At what value should closing stock appear in the final accounts, and what is the underlying convention?

Closing stock should be shown at Rs 80,000, the lower of cost Rs 90,000 and net realisable value Rs 80,000. This follows the conservatism or prudence convention, under which anticipated losses are provided for but anticipated gains are not recognised.

  1. ARs 80,000, following conservatism (lower of cost and net realisable value)Correct
  2. BRs 90,000, following the cost concept
  3. CRs 85,000, the average of the two values
  4. DRs 80,000, following the going concern concept

Explanation

Stock is valued at the lower of cost and net realisable value, which applies prudence or conservatism by recognising anticipated losses but not anticipated gains. So Rs 80,000 is used. Valuing at cost ignores the expected fall in value.

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