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CMA Foundation · Fundamentals of Financial and Cost Accounting · Accounting Principles, Concepts and Conventions

Sharma Stores values its closing stock at cost Rs 80,000, while the net realisable value is Rs 72,000. Following the convention of conservatism, at what amount should the closing stock be shown?

Closing stock should be shown at Rs 72,000. Conservatism requires that anticipated losses be recognised while unrealised profits are not, so stock is valued at the lower of cost, Rs 80,000, and net realisable value, Rs 72,000.

  1. ARs 76,000
  2. BRs 72,000Correct
  3. CRs 80,000
  4. DRs 8,000

Explanation

Stock is valued at the lower of cost and net realisable value. Cost is Rs 80,000 and NRV is Rs 72,000, so the lower amount, Rs 72,000, is used. Rs 80,000 would anticipate a profit that is not supported, and Rs 76,000 is just an average with no basis.

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