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CMA Foundation · Fundamentals of Financial and Cost Accounting · Four Frameworks of Accounting and Forms of Organization

Sharma & Co. had opening stock of ₹40,000. During the year it bought goods for ₹2,10,000. At year end, stock has cost ₹50,000 and net realisable value ₹44,000. Following the convention of conservatism, at what value should closing stock be shown, and what is the cost of goods sold (ignoring other expenses)?

Closing stock is shown at ₹44,000, the lower of cost ₹50,000 and net realisable value ₹44,000, as conservatism requires. Cost of goods sold is 40,000 plus 2,10,000 minus 44,000, which equals ₹2,06,000. Valuing at cost would understate the cost of goods sold.

  1. AStock ₹50,000; cost of goods sold ₹2,00,000
  2. BStock ₹44,000; cost of goods sold ₹2,06,000Correct
  3. CStock ₹44,000; cost of goods sold ₹2,00,000
  4. DStock ₹50,000; cost of goods sold ₹2,06,000

Explanation

Stock is valued at lower of cost and net realisable value, which is ₹44,000. Cost of goods sold = 40,000 + 2,10,000 − 44,000 = ₹2,06,000. Using ₹50,000 ignores the anticipated loss and gives ₹2,00,000, which is wrong under conservatism.

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