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

Mehta Traders measures its closing stock at Rs 2,40,000 cost; its net realisable value is Rs 2,10,000. The firm records the stock at Rs 2,10,000. Which qualitative characteristic or concept of the Framework/accounting policies chiefly supports this treatment?

Prudence chiefly supports the write-down. Stock cost Rs 2,40,000 exceeds net realisable value Rs 2,10,000, so the expected loss of Rs 30,000 is recognised immediately, whereas unrealised gains are not anticipated. This cautious approach to uncertainty is what the prudence concept requires.

  1. APrudence, because anticipated losses are provided for while unrealised gains are notCorrect
  2. BConsistency, because stock is valued the same way every year
  3. CMateriality, because the difference is small
  4. DGoing concern, because the business will continue indefinitely

Explanation

Writing stock down to NRV recognises a probable loss of Rs 30,000 (2,40,000 - 2,10,000) though not yet realised, while any gain above cost would be ignored. This is the application of prudence. Consistency concerns unchanged methods, and going concern does not by itself justify a write-down.

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