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CA Intermediate · Advanced Accounting · AS 4 Contingencies and Events occurring after the Balance Sheet Date

Narmada Foods Ltd has a financial year ending 31 March 2026, and its accounts were approved on 30 June 2026. The closing inventory includes goods costing Rs 12,00,000. After the year end, in April 2026, the company sold these goods for Rs 9,00,000 net of selling costs, because of damage that had occurred in February 2026. The goods were included at cost in the closing inventory. What is the amount by which closing inventory should be adjusted?

The inventory should be reduced by Rs 3,00,000. The April sale proceeds give evidence of net realisable value at the balance sheet date for damage that occurred before it, so it is an adjusting event, and inventory moves from cost of Rs 12,00,000 to Rs 9,00,000.

  1. AReduced by Rs 3,00,000Correct
  2. BReduced by Rs 12,00,000
  3. CNo adjustment, only disclosure
  4. DIncreased by Rs 9,00,000

Explanation

The sale after the year end provides evidence of net realisable value at the balance sheet date, since the damage happened in February. This is an adjusting event. Inventory is valued at the lower of cost and NRV: 12,00,000 - 9,00,000 = 3,00,000 write-down. Making no adjustment ignores the evidence the sale provides.

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