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CA Intermediate · Advanced Accounting · AS 2 Valuation of Inventory

Mahesh Foods Ltd. had 1,000 units of finished goods at year end with cost Rs 400 per unit. Selling price is Rs 450 per unit, but selling expenses of Rs 60 per unit are needed to make the sale. The goods are made from raw material which is held for use in production. At what value will the finished goods be carried in the balance sheet?

The finished goods are valued at Rs 3,90,000. AS 2 requires inventory at the lower of cost and net realisable value. NRV is selling price Rs 450 less selling expenses Rs 60, which is Rs 390 per unit, below cost of Rs 400, so 1,000 units give Rs 3,90,000.

  1. ARs 4,50,000
  2. BRs 3,90,000Correct
  3. CRs 4,00,000
  4. DRs 3,60,000

Explanation

Net realisable value = 450 - 60 = Rs 390 per unit. Cost is Rs 400, so the lower is NRV Rs 390. Value = 1,000 x 390 = Rs 3,90,000. Using gross selling price ignores the costs necessary to make the sale.

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