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CA Intermediate · Advanced Accounting · AS 2 Valuation of Inventory

Madhav Foods Ltd. holds 500 units of finished goods at year end. Cost per unit is Rs 240. The units are held to fulfil a firm sales contract at Rs 260 per unit. The general selling price of the same goods is Rs 230 per unit, and selling expenses are Rs 10 per unit. Under AS 2, at what value should these 500 units be shown in the balance sheet?

The inventory is valued at Rs 1,20,000. Because the units are held for a firm contract, NRV uses the contract price: Rs 260 less Rs 10 selling expense, which is Rs 250. This exceeds cost of Rs 240, so cost applies: 500 x 240.

  1. ARs 1,10,000
  2. BRs 1,15,000
  3. CRs 1,20,000Correct
  4. DRs 1,25,000

Explanation

For goods held to fulfil a firm contract, net realisable value is based on the contract price: 260 - 10 = Rs 250 per unit. Cost Rs 240 is lower, so value is 500 x 240 = Rs 1,20,000. Using the general price (230 - 10 = 220) would give Rs 1,10,000, which is wrong because the contract price applies.

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