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

Meera Ltd. has inventory costing ₹1,20,000 that has a net realisable value of ₹95,000 at the year end. It records inventory at ₹95,000. Which qualitative characteristic or concept most directly supports recognising this write-down?

Prudence supports the write-down. Inventory is stated at the lower of cost and net realisable value, so the expected loss of ₹25,000 is recognised now instead of being deferred, which avoids overstating assets and profit.

  1. APrudence, as probable losses are provided for rather than deferredCorrect
  2. BComparability, as inventory must be valued at cost
  3. CGoing concern, as the business will close
  4. DEntity concept, as owners are separate from the business

Explanation

Prudence requires caution so that losses expected are provided for, while unrealised gains are not anticipated. Writing inventory down by ₹25,000 (1,20,000 − 95,000) to NRV recognises the likely loss. Comparability does not require retaining cost when NRV is lower.

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