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CMA Intermediate · Financial Accounting · Accounting Fundamentals

Nirmal Textiles bought goods costing Rs 80,000 and at the year end had unsold stock of cost Rs 25,000 whose net realisable value is Rs 20,000. Applying the prudence convention and the principle of valuing inventory at lower of cost and net realisable value, at what amount should this stock be shown in the Balance Sheet?

The stock should be shown at Rs 20,000, because inventory is valued at the lower of cost, Rs 25,000, and net realisable value, Rs 20,000. Prudence requires recognising the anticipated Rs 5,000 loss immediately rather than carrying the stock at cost.

  1. ARs 25,000
  2. BRs 20,000Correct
  3. CRs 22,500
  4. DRs 5,000

Explanation

Inventory is valued at the lower of cost (Rs 25,000) and net realisable value (Rs 20,000), so Rs 20,000. Showing Rs 25,000 ignores the expected loss of Rs 5,000. Rs 5,000 is merely the write-down amount, not the carrying value.

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