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

Ramesh Steels Ltd. had inventory costing Rs 4,00,000 at year end. Its estimated selling price is Rs 4,60,000 with Rs 30,000 of selling costs to be incurred. An accountant argues that the Rs 60,000 expected gain should be recognised now because the sale is near-certain. Which qualitative characteristic or concept most directly supports valuing the inventory at Rs 4,00,000, and what is the value of the inventory?

Inventory should be shown at Rs 4,00,000, supported by prudence. Net realisable value of Rs 4,30,000 is higher than cost, but inventory is stated at the lower of the two, so the unrealised gain is not anticipated before the sale actually occurs.

  1. APrudence; Rs 4,00,000, as unrealised gains are not anticipatedCorrect
  2. BMateriality; Rs 4,60,000, as the gain is significant
  3. CComparability; Rs 4,30,000, being net realisable value
  4. DTimeliness; Rs 4,60,000, being selling price

Explanation

Cost is Rs 4,00,000 and net realisable value is 4,60,000 - 30,000 = 4,30,000, which exceeds cost, so inventory stays at the lower, cost. Prudence means unrealised gains are not anticipated. Using NRV of 4,30,000 would recognise an unrealised profit of 30,000.

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