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

Sharma Textiles Ltd. has a stock of finished cloth that cost ₹8,00,000 to produce. At the year-end the cloth can be sold in the market for ₹7,20,000 after incurring selling costs of ₹20,000. In applying the Framework's measurement concepts and the prudence principle, at which amount is the stock best reported, treating realisable value as net of selling costs?

The stock should be reported at ₹7,00,000. Net realisable value is the expected selling price of ₹7,20,000 less selling costs of ₹20,000. Since this is lower than cost of ₹8,00,000, prudence requires the lower figure, so the expected loss is recognised now.

  1. A₹8,00,000
  2. B₹7,20,000
  3. C₹7,00,000Correct
  4. D₹7,40,000

Explanation

Net realisable value = 7,20,000 - 20,000 = 7,00,000. Cost is 8,00,000. Under prudence and AS 2, inventory is stated at the lower of cost and NRV, so ₹7,00,000. Using ₹7,20,000 ignores selling costs, which is the wrong base.

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